Using Your Home for Income, Part 3: Downsizing

October 4, 2016
DMD Staff

One way to boost your nest egg in retirement is to move to a smaller home. However, downsizing alone isn't always a financial boon.

In the first two parts of this series, we looked at reverse mortgages and their benefits and drawbacks. But there’s another strategy you can use to accumulate retirement income from your home: downsizing to a smaller or less expensive residence.

While spending less on a mortgage or on property taxes can be undeniable boost to income, the decision can be a difficult one. The mere idea of downsizing can be very difficult for many people, because of the emotional investment many have in their home, and also because it means not leaving the family home as an inheritance. But there are some financial reasons for not downsizing as well. Let’s take a look.

Is downsizing right for you?

A common view of retirement income is to treat a home not as an investment, but as a living expense. But this view can be complicated. If your home has increased significantly in value, or if property taxes have made living in your area a very expensive proposition, it may be worth looking into the pros and cons of a move to a different or smaller property.

First, smaller doesn’t always mean less expensive. Moving closer to an urban area with easily accessible public transportation may mean less house at a similar cost, or higher taxes. Don’t consider size alone the determining factor in how much the new housing situation will cost. When looking at current property values and property tax obligations, consider future growth or other economic factors that may lead to a spike in your costs. For example, a large urban development project on the horizon may mean that property taxes will soon be headed in the wrong direction for someone looking to save money.

Also consider whether downsizing will free up as much money as you think. In areas that are already low-cost, choosing a smaller property may not mean all that much difference to the bottom line.

Two Hidden Factors

Selling your home and purchasing a cheaper one leads to a capital gain, and capital gains are “taxable events.” That means that Uncle Sam will be coming for a piece of that income, but only if it’s an especially large gain. Moving, of course, also comes with realtor fees and closing costs.

Perhaps most important of all, downsizing comes with the emotional toll of leaving a place you may have called home for a very long time. Factor into your decision whether the “extra” spending money you’ll have will be enough to assuage missing the place that you’ve called home for a long time.