The Upside to Downsizing

When someone tells me they’re considering downsizing, I like to ask a few questions to see how much thought they’ve given the idea.

My first question is always how much do you think your house is worth on the market today?

The answer is almost always a best guess and usually very generous.

The second question I ask is do you know how much a one- or two-bedroom home costs in the neighborhood you’re looking to buy?

Most people grossly underestimate the price of smaller houses these days.

The reason why retirees choose to downsize can vary, but it’s usually for one of two reasons:

  • More money
  • Forced to move due to health issues

I’m sure you’ve dreamt of one day selling the family home and going on an extravagant trip or buying a brand new car with the profits. Heck, you might even settle for just one less bathroom to clean or driveway to shovel.

But downsizing doesn’t always get you ahead. Sometimes it’s a whole lot of work for nothing or a lot less gain than you originally thought.

There are a few questions you need to ask before you put up that For Sale sign on the lawn. Here are five things you need to consider before downsizing.

  1. How Much is Your Current Home Actually Worth?

Famous Duke psychology and behavioral economics professor Dan Ariely, conducted an experiment where he raffled tickets to a major basketball game in one of his classes. He asked his students to guess how much the tickets were worth.

The students who didn’t win any tickets estimated around $170 a ticket, whereas the winning students would not sell below an average of $2,400.

Ariely’s conclusion was that ownership makes us add zeros to the selling price. Also known as the endowment effect.

Your home and possessions are no different. This is why so many people overestimate how much their house is worth and underestimate how much a new home costs.

To get a more accurate price on your house, there are few things you can do. First, visit sites like and and see how much houses in your neighborhood are selling for today.

Next, try some of the online estimators from major banks, like Bank of America and JP Morgan Chase. These will give you another set of numbers you can cross reference. The last option is to talk to a real estate agent.

I usually recommend this step last because the agent may or may not give you a rosy estimate in order to win your business. If you have friends who are agents, it’s best to consult with one of them to at least make sure you get an honest opinion.

Lastly, if the numbers look promising and you’re leaning toward selling, consider some inexpensive upgrades to boost your home’s selling price even more. Be careful though, most major home renos rarely recoup their cost.

For example, a bathroom remodeling recoups on average 72% of it’s cost. Save yourself the time and money by investing in smaller upgrades like outdoor lighting and landscaping that can help sell your home faster.

  1. How Much Will Your New Home Cost?

Once you’ve established how much your current home is worth, you need to look at how much it will cost to move to a smaller place.

The opposite effect is at work here. Now that you don’t own the property, your estimate is usually quite different.

You also have to realize that potential sellers are thinking the same way you were and overestimating how much their house is worth.

Here’s where to start: Use the tools I shared with you above and research selling prices for the type of home you wish to buy.

What you’ll find is the one- and two-bedroom houses are in short supply and not as cheap as you probably imagined. This is because you’re now competing with young couples looking to buy their first starter home.

Also consider where you want to move to. If you’re considering a new city or state, make sure you visit at least a few times at different points throughout the year so you know what you can expect.

If you can afford it, rent a place for one year in the city you want to live before you buy. This way you don’t have to fully commit and if you don’t like the community you can always move somewhere else.

  1. How Will Downsizing Affect Your Taxes?

This could be good or bad news depending on how you look at it. For gains less than $500,000, couples don’t owe any income tax on the profits. For singles, you’re excluded up to $250,000.

The rules also take into account how long you’ve lived in your house and how long you’ve owned it. You can find the current rules in IRS Publication 523, “Selling Your Home.”

If the sale of your home exceeds the exclusion or you’re in a much higher tax bracket, you might need to consider other strategies like tax-loss harvesting to offset other investment losses with the gains.

Also, consider how much your new property taxes will cost you. Some states with lower property taxes might have higher sales or income taxes, or your pension might be taxed differently.

First, estimate how much you are likely going to profit. This is not just the difference between what you paid for your home and what you sold it for, it’s the difference between the selling price and your home’s cost basis.

Cost basis is what you paid initially plus any permanent improvements you made over the years. IRS Publication 523 explains.

Even if you don’t owe any income tax on the gains, you should still try to compare the income and property taxes of your new retirement destination with those of your current location.

Start by researching the state’s tax or revenue department website. Try to determine how much you’ll pay in taxes at your new location compared to what you’re paying now.

  1. What Other Hidden Costs Are You Forgetting?

If it’s been awhile since you’ve bought a new home, you probably don’t remember all the closing costs you had to pay. These add up quickly and can erode any gains you might be making.

Closing costs typically include legal fees, recording fees, title insurance, and real estate agent commissions. You can try to get the seller to absorb some of the closing costs, but keep in mind that whoever buys your home will try the same maneuver on you.

Other hidden costs include furniture. Downsizing to a smaller house or condo usually means most of your old furniture won’t fit or match your new home’s decor.

Buying new furniture and decorating can eat into profits as well. It’s also worth considering how the sale of your home will affect any medical aid or benefits you’re currently receiving.

In some cases, you may lose benefits temporarily until you spend down the gains you made on out-of-pocket medical expenses.

Final Word

Downsizing can be a great way to boost your retirement nest egg, simplify your life, and live out your golden years in a new location. But, it’s not always a profitable endeavor.

Sometimes the timing doesn’t work and it pays to retire in place, at least for a little while longer. So, before you start packing, run the numbers to be sure you’re making the best decision.

To a richer life,

Nilus Mattive

Nilus Mattive

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Nilus Mattive

Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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