Downsizing benefits retirees in multiple aspects of their lives. Financially, a smaller home is cheaper to maintain and makes it easier to save money. Physically, it is both easier and safer for older adults to live in a small house.
While downsizing seems like the perfect idea for retirement, due diligence is still a must. Below are some important factors you need to consider before making a decision.
Downsizing can affect your estate plan
Selling your home to move to a smaller one will likely affect your estate plan, which is why it is a good idea to review it before putting your current home up for sale.
For example, you may want to rethink the distribution of your assets, considering that selling the home may convert home equity into liquid funds. You may also want to use asset protection strategies to preserve your assets, including your new home, for the future.
The proceeds from the home sale can affect your taxes
Delaware follows the federal capital gains exclusion rules for primary residences. Single homeowners can exclude up to $250,000 of capital gains. Married couples can exclude up to $500,000 if filing jointly. However, this only applies to primary residences, meaning you cannot exclude capital gains for vacation homes or investment properties.
If the profit from selling your current home exceeds the exclusion amount, you must report it on both your federal and Delaware state tax returns. The profit above the exclusion may also count toward your taxable income for the year, which can lead to higher tax obligations.
That said, it’s important to adjust your retirement budget for potential taxes. Proper preparation can help ensure financial security when you downsize.
Getting a mortgage later in life can have different implications
Getting a mortgage can present unique challenges. For instance, it may be harder to qualify if you have limited retirement income, a high debt-to-income ratio or an existing house. You may have to reduce your debt and sell your old home to secure a new loan with reasonable interest rates.
Paying cash may be a better option in some circumstances, such as when you have enough savings to not need the equity.
Downsizing comes with its own set of complexities. If you’re planning to downsize for retirement, legal guidance from a real estate attorney can help you avoid the common pitfalls and guide you toward the best choice.