Often retirees have planned to downsize their homes once they hit their retirement years by selling off a family home that is too large for their current needs. While downsizing may be a smart financial move for you, it could also be a financial setback if you’re not careful.
Don’t Overestimate Your Home’s Worth
Many soon-to-be retirees have high hopes for how much their home will fetch on the market. It’s natural to expect the best when you sell the home, especially if you’ve invested a lot of your time and money over the years. However, it’s important to go into this with a realistic expectation and to take your own emotions out of it as much as possible, which can be difficult when you’re talking about a home where you may have raised children and spent time as a family. Understandably, you may have deep emotional ties to the home that you’re downsizing.
To get a true sense of your home’s worth, you can discuss your situation with one or more realtors. You may wish to get estimates from several agents, or even get an estimate from a real estate appraiser. There are multiple websites where you can get a quick estimate of the retail value of your home, based on comps within your neighborhood that have sold – but keep in mind that your home may have a different value if it needs repairs, etc.
Speaking of repairs, most remodeling projects won’t be worth the money that you’re investing on the sale. If you spend a lot of money renovating a kitchen, a potential buyer may not find that it’s to their taste and wish to renovate it on their own anyhow, or try to negotiate the price lower. That’s not to say that your home shouldn’t be clean and staged, which can be accomplished with the help of either your realtor or a professional home stager. A realtor or a home appraiser can also provide insight into which renovations may be most useful in your specific scenario.
Don’t Neglect The Taxes
When you’re downsizing your home, you may need to factor in the tax changes that this could bring into your life. The IRS specifically has a publication called “Selling Your Home” which can provide guidance for your home sale. Beyond just the taxes involved with your home sale, there may also be additional tax scenarios linked to your downsizing. If you’re moving to a new state when you downsize, that state may have different tax laws than your current state. It’s important to consider the potential tax scenarios that could change when you’re moving to a different, smaller home. A tax professional and a financial planner can help you to navigate any gains taxes that may be associated with the sale of your home, in addition to any taxes that may change with your new lifestyle.
Don’t Assume Your Downsized Home Will Be Cheaper
Many retirees assume that because they’re selling a (likely) larger home, and moving to a smaller home, that it will be cheaper. This isn’t always the case though – the housing market can be fickle and the cost of homes can vary. In some locations you may find that a smaller home is much more expensive than your current home. If you plan on moving to a warmer area, the cost of living may be higher there and the home prices may be much higher. It’s important to research the cost of living and the current home prices where you’re planning to live so that you don’t underestimate the cost of your new home. You also need to account for incorporating any closing costs, insurance, and potential fees within the budget of your new home while you’re at it. Again, a real estate agent and a financial planner may be able to help you sort through the intricacies of these complicated situations so that you feel more prepared for your future.
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By Andrew Rosen, Contributor at Forbes
Published April 18th, 2024