Downsizing in Retirement

Feb 6, 2023
Estate Planning Tax Planning
Downsizing in Retirement | AmeriEstate Legal Plan

If you are nearing retirement age or already there, you may find that your current home no longer fits your needs. Whether your house has too much square footage to keep up with, your maintenance costs are too high, or both, downsizing provides a possible solution. However, trends in the housing market and taxes could lead to potential challenges. You may overcome some of them with careful planning and research.

Housing Market Trends To Look For

The housing market can be fickle. In addition to the usual seasonal trends, the market reacts to mortgage interest rates, stock market fluctuations, general economic conditions and supply-and-demand factors. If you put your house on the market before understanding the state of the housing market, you run the risk of increasing your expenses or not finding a new home to move into before your house sells.

Housing Costs

In January 2021, the interest rate on a 30-year fixed mortgage dropped to a record low of 2.65%. Still, by November 2022, rates had increased to a national average of 7.24% before dipping slightly to 6.46% in January 2023. January rates are the highest rates seen since 2002. Furthermore, the average cost of a home in July 2022 was $564,900, compared to $248,400 in 2003.

You could end up with a higher mortgage rate than you currently have, even if you downsize. Interest rates and housing costs vary by location. If you own your home outright, selling your house may provide you with enough cash to purchase a lower-priced, smaller home. However, if you still carry a mortgage, you could run into higher payments due to increased interest rates.


Another factor to consider is the supply and demand for smaller homes. Retirees aren’t the only ones looking for smaller homes. Younger generations buying their first houses often seek out lower-priced residences with a small footprint.

In 2022, younger Millennials made up 18% of the homebuyer’s market, while older Millennials comprised 25%. This generation also constituted the largest percentage of first-time homebuyers. Additionally, 5% of all homebuyers bought a new house because they wanted a smaller home.

Tax Concerns To Prepare For

Taxes are another potential sticking point. The federal Internal Revenue Service (IRS) levies capital gains taxes when the sale of a primary residence results in a $250,000 profit for singles or $500,000 for adults. An AmeriEstate trust expert may have a solution that helps you lower or avoid capital gains taxes.

Measures To Take Before Putting Your House on the Market

Before you place your house on the market, take time to prepare, so you don’t get caught off-guard with unexpected expenses. We recommend the following:

  • Research the housing market to determine interest rates and purchase trends. Realtors can help with this, but it’s good to talk to a few.
  • Check out property taxes in your desired locations. Some places offer lower rates to seniors.
  • Compare your current costs with all the expenses you incur from preparing your home for sale, selling it, and purchasing a new residence.

If you stand to make above the federal threshold for capital gains taxes, you may also wish to consult with an AmeriEstate advisor to discuss your options. They can also advise you on how downsizing could impact your estate plan. Contact us for a free consultation before you put the for sale sign up!