OVERVIEW
Downsizing to a smaller home or an active adult community can add real money back into a retirement budget. Selling frees up home equity, often shielded from capital gains taxes up to $250,000 for single filers and $500,000 for married couples. Smaller homes also cut property taxes, home insurance premiums, and maintenance costs, while active adult communities fold landscaping, roof upkeep, and HOA fees into one predictable bill.
The kids are grown and out of the house, and you’re suddenly aware of your home’s size and the amount of space going unused. Maintaining a large home with unused bedrooms and bathrooms is time-consuming and can quickly become costly as the home ages.
As home values rise, property taxes and home insurance premiums for larger homes become a significant expense. You’re also likely maintaining large pieces of unused furniture that no longer serve a purpose in your current lifestyle. For many people nearing retirement, the question of whether to downsize is related to the financial burdens of owning a large home.
If you’re looking for the right amount of space to fit your current lifestyle, you’ll be happy to know there are many financial benefits to downsizing for retirement. From unlocking home equity to reducing maintenance costs and even saving on living expenses, downsizing your home could put more cash in your pocket for enjoying this new stage of life.
Here are six ways downsizing your home can lead to an upsized bank account.
Freeing Up Home Equity
63% of homeowners 65+ have fully paid off their homes, and property values have soared over the last decade. Selling your home puts that increased value in your pocket to invest in a property aligned with your lifestyle. Using the proceeds from your home sale for a larger down payment or an all-cash purchase will reduce your mortgage payments, which can be a necessity if you’re on a fixed income.
Also, selling unused items inside your home (like extra furniture) can increase your total gains, giving you more to spend on your future.
Reduced Maintenance Costs
Eight out of every 10 active adults are living in dwellings with unused spare bedrooms. These homes also often have extra bathrooms, which add to the cost of plumbing maintenance. Bathrooms are exposed to water every single day, regardless of how much they’re used. Minor issues, such as cracked grout joints, small plumbing drips, or loose bathtub caulking, allow moisture to find its way into places homeowners never see, creating damage that leads to major future repair costs.
Outside of major repairs, routine home maintenance costs can quickly eat into your monthly budget. Average home maintenance costs add up to thousands spent per year, and more square footage requires more space to maintain. For example, homeowners pay an average of $2,722 annually for house cleaning, $823 annually for lawn care, $1,471 for a single roof repair, and into the five-figure range for a full roof replacement.
Moving into an active adult community can help you reduce maintenance costs even further, as they’re often rolled into homeowners association (HOA) fees. Communities often take care of exterior maintenance, like landscaping and common area upkeep, and even roof maintenance, reducing extra living costs.
Lower Property Taxes
Smaller homes are valued lower than larger ones, which lowers your annual tax bill. This can be especially significant if you’re selling a property with notable acreage. If you’re considering moving to a different state, you can lower tax bills even further by choosing a state with tax advantages for retirees.
Understanding Capital Gains Taxes
For many, fears of paying thousands in capital gains taxes are a deterrent to selling a home that is too big for their needs. Capital gains taxes are taxes on the amount you make from a home sale. For example, if you paid $150,000 for your home and sell it for $600,000, you gain $450,000. However, most people are eligible to exclude up to $250,000 ($500,000 for married couples filing jointly) of capital gains from their income tax. This exclusion can reduce the tax burden of selling or eliminate it.
Avoiding Home Modification Costs
Many retirees without a mortgage assume staying in their current home will help them save. However, it’s crucial to consider your future needs when calculating the costs of aging in place. Larger homes often have two floors, with bathrooms and bedrooms on the upper level. Older homes may also be built with smaller hallways, steep stairs, and narrow door frames, all of which can affect accessibility and require future modifications.
71% of adults who plan to age in place say their home has both indoor and outdoor accessibility issues, and 79% say they would need to modify bathrooms. The costs of modifications can vary depending on the age of the home and the necessary work, with averages ranging from $3,000 for modest changes to $50,000 for major structural repairs. Moving into a home suited to your physical needs allows you to avoid the stress and expense of home modifications.
Accessible Health Care and Wellness Amenities
Maintaining good health can significantly help you protect your retirement savings by reducing medical costs associated with injuries or worsening medical conditions. The choices you make when downsizing can have significant health benefits.
- A smaller home has fewer maintenance requirements, reducing the risk of injury for homeowners who continue DIY maintenance.
- Changing your location can make health care more accessible, reducing the cost of travel to see doctors or specialists.
- Choosing a home in an active adult community can eliminate outdoor and seasonal maintenance requirements that can lead to injury, such as lawn care, tree trimming, roof repair, and snow removal.
- Many active adult communities have on-site amenities, such as swimming pools, tennis courts, walking and hiking trails, rec rooms, fitness rooms, and golf courses. Some also offer fitness classes and access to nutrition programs to support a healthy lifestyle.
Reduced Home Insurance Costs
While homeowners insurance isn’t required by law in any state, it’s highly recommended and required by most mortgage providers. Downsizing your home reduces your total property value, square footage, and typically the amount of possessions you need to insure. Smaller homes may also feature fewer hazards (such as large trees) that can spike your insurance premiums. If you’re moving to a condo, you can switch from a comprehensive homeowners policy to a condo policy, which can be significantly cheaper. In general, smaller homes require less material and labor to rebuild, which makes them cheaper to insure.
FAQ: Downsizing for Retirement
Is downsizing a good financial decision for retirement?
Yes, for many retirees, downsizing frees up cash through home equity, lowers property taxes, and reduces maintenance and insurance costs. Selling a paid-off home can add a substantial lump sum to retirement savings, and a smaller home typically costs less to insure, heat, and repair. The right move still depends on your mortgage balance, local market, and how much space you actually use day to day.
How much money can you save by downsizing your home?
Downsizing can save money in several ways at once: home equity from a sale, lower property taxes on a smaller assessed value, reduced home insurance premiums, and thousands less per year in maintenance costs like lawn care, roof repair, and house cleaning. Moving into an active adult community can add further savings by folding landscaping and exterior upkeep into one HOA fee. Total savings vary widely by location and home size.
Do I have to pay capital gains tax when I sell my home?
Most home sellers don’t owe capital gains tax on the full profit from a sale. Single filers can typically exclude up to $250,000 of capital gains, and married couples filing jointly can exclude up to $500,000. This exclusion often reduces or eliminates the tax owed, though eligibility rules apply.
Does downsizing lower your property taxes?
Yes, smaller homes are typically assessed at a lower value than larger ones, which usually reduces the annual property tax bill. Moving to a state with tax advantages for retirees can lower that bill even further.
Are HOA fees worth it in a 55+ community?
HOA fees in an active adult community often cover landscaping, common area upkeep, and sometimes roof maintenance, expenses homeowners would otherwise pay for separately. For many downsizers, folding these costs into one predictable fee is simpler and can even be cheaper than maintaining a larger home solo. Choose an HOA if you’d rather budget one monthly cost than handle exterior maintenance yourself.
How much does it cost to modify a home for aging in place?
Home modification costs typically range from $3,000 for modest changes to $50,000 for major structural repairs, depending on the home’s age and the work needed. 71% of adults who plan to age in place report their home already has accessibility issues, and 79% say they’d need to modify at least one bathroom.
Is it cheaper to modify your current home or move to a more accessible one?
It depends on how extensive the needed changes are. Moving into a home already suited to your physical needs, such as one with a single level, wider hallways, and step-free entries, can avoid the five-figure cost of major structural modifications. Choose moving if your current home would need major structural work; choose modifying if only minor accessibility updates are needed.
Does downsizing help you save on health care costs?
Indirectly, yes. A smaller home has fewer maintenance tasks that can lead to injury, and relocating can put you closer to doctors, specialists, and active adult community wellness amenities like fitness rooms and walking trails. Reducing injury risk and travel time both help protect a retirement budget from unplanned medical costs.
How much does homeowners insurance cost on a smaller home?
Homeowners insurance costs typically drop when you downsize, since insurers base premiums largely on square footage, property value, and the value of belongings covered. Switching from a single-family home to a condo can lower costs further, since condo policies usually cost less than comprehensive homeowners policies.
Is 65 too late to downsize?
No, many retirees downsize well into their 60s, 70s, and beyond. 63% of homeowners 65 and older have already paid off their homes, which puts them in a strong position to sell and reinvest the proceeds into a smaller, more manageable property.
Do active adult communities help retirees stay active and healthy?
Yes, many active adult communities include on-site amenities such as swimming pools, tennis courts, walking and hiking trails, fitness rooms, and golf courses. Some also offer fitness classes and nutrition programs, giving residents more built-in opportunities to stay active than a home in a rural or spread-out area might.
How do I find the right size home for my next stage of life?
Start by listing which rooms and features you actually use in your current home, since unused bedrooms, bathrooms, and storage space are the biggest drivers of unnecessary cost. From there, comparing homes and active adult communities sized to your real needs can reveal meaningful savings in taxes, insurance, and upkeep. Contact 55places.com to start comparing homes and communities sized to fit your life today.
55places Can Help You Downsize
For retirees with large homes, the financial benefits of downsizing often outweigh the costs of moving. A free home value estimate can help you understand what your current home may be worth and how much equity you could have available for your next home. Relocating to an active adult community can help you reduce living costs even further by cutting maintenance requirements, offering access to on-site amenities, and giving you a wide selection of homes and condos to fit your next chapter. Contact 55places.com today!
- Insights and market stats
- Instant new home alerts
- Answers from local 55+ experts
