“Downsizing” is a term often associated with senior citizens, but there’s really no specific group that fits the mold. Individuals who want to move into a smaller, more manageable home have varying situations and priorities.
“Anytime there’s a life transition—the death of a spouse, a divorce, or kids fleeing the nest, young families reducing to one salary, or people who simply want less financial stress—these are all experiences where people downsize,” says Lindsey Harn, a residential real estate agent and owner of Lindsey Harn group in San Luis Obispo, California. “Downsizing could allow you to travel more, send your kids to private school, or whatever is important to you at this phase in your life.”
Below, Harn shares the questions you have to ask yourself (or a trusted pro) before you sell your home or buy a new one.
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1. Can I buy first and then sell, or do I need to sell first and then buy?
In a perfect world, Harn says it’s best to buy your new home before selling your old one. This isn’t financially possible for a lot of people, but there are benefits to operating on this timeline.
“Selling your house and not knowing the specific house that you’re going to be moving into can create a lot of stress and anxiety, and knowing exactly what the new house is going to cost and where you’ll live gives more peace of mind,” she says. “And when you’re downsizing, you often have to purge and get rid of a lifetime of stuff, which can be difficult when you don’t know what you’ll need in their new house.”
Harn says that you shouldn’t expect to own both homes for long—in most cases, she says properties should sell within 60 days.
2. How soon are you ready to downsize?
It’s never too early to reach out to a real estate professional about your intentions to downsize. Harn often works with seniors who plan to downsize in the next year or two, which gives them plenty of time to take care of any repairs or aesthetic changes that could help them sell their home.
3. Is this a financial or lifestyle downsize, or both?
“Sometimes a physical downsize is not always a financial downsize,” Harn says. For instance, an increased demand for one-story homes among seniors selling multi-story homes could make the values more neutral. If you’re hoping to spend less money to pay off debt or pocket some extra cash, make that goal clear with your agent.
Or perhaps you want to make moves for a “downsized” lifestyle. Purchasing a smaller home could get you closer to grandkids, the beach, or a hospital—or it could limit or eliminate your need to do yardwork. Once the priorities are outlined, Harn says she takes clients out to see what these buyers can get in their desired price range.
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4. Are you planning or going to try to transfer your property tax base?
Harn suggests reaching out to your real estate agent or local assessor’s office to explore the potential cost of property taxes. In California, you may be eligible to transfer your original tax base.
“If you pay $900,000 for a new home, your taxes are now going to be $9,100 per year, which could more than double your yearly property tax,” she says. “For someone who’s in retirement or nearing retirement, it can be a big deal.”
5. Are you going to have a tax implication with capital gains?
Harn also advises checking in with your CPA or tax preparer about tax implications with capital gains. California’s capital gains tax matches the federal rule: If you are a single person and gain less than $250,000 from the sale of your home and have owned and occupied it for at least two years, you do not have to report the sale. The same rules apply to married couples, but with a $500,000 cap. Any gains over $250,000 or $500,000, respectively, are taxable.
“If this is their retirement and they’re counting on taking all of those funds to the new house, I want to make sure there’s no surprises,” she says. “If they’re subject to any capital gains, it could eat into the profit of the sale.”
6. How much will the insurance be on a new house?
“If someone’s been in their home for a long time, the insurance can be reasonable,” Harn says. “Are they going to be subject to significant increases in their yearly homeowners insurance cost?” To learn more, you can request a quote from your current insurance provider or one who covers the area where you’re hoping to purchase a new home.
Looking for more downsizing advice? Check out a professional organizer’s tips to downsizing here.
