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Do the Math

The financial implications of downsizing

By Morgan Baker

When Maria and Josh Whitehead (not their real names) decided to downsize, they thought it was a five-year plan, but when the perfect ranch house came on the market in their neighborhood in Pittsburgh, they knew they had to grab it, as the ranch inventory is small. Their first home was three floors and Maria, 62, knew her knees couldn’t take the up and down of it much longer – she’d already broken an ankle and a toe. In addition to the house, they had a garage, but it wasn’t attached and navigating the icy distance from garage to house in the winter was harrowing, and would become even more so as they aged. Maria was looking forward to living on one level, so when they drove by a “For Sale” sign on the house they eventually bought three streets over, they jumped on it and put an offer in that day.

The Whiteheads were lucky. They bought their downsized home under asking, and when they put their original house on the market a few months later, it sold in a week, over asking. 

But, before you jump at the next condo listing you see, you’ll want to know what’s in store for you financially and for your lifestyle.

Because they moved so fast and without expecting to, this meant carrying two mortgages for a bit while they got the house where they raised their two sons for 26 years ready to sell.

For the Whiteheads, downsizing made sense, but before you jump at the next condo listing you see, you’ll want to know what’s in store for you financially and for your lifestyle.

“What to look for depends on how long the person is planning on living there,” says Victoria Kennedy, a realtor with Coldwell Banker Residential Brokerage in Cambridge, Mass. If it’s someone who wants to live in a place until their old age, look for elevators, or first floor living, full service buildings, a neighborhood that’s walkable, and garage parking. Some people want a ‘curbless’ shower, or the ability to put one in. People like ensuite bathrooms for sure. People also look for a place for a caregiver to be able to stay if it becomes necessary, she says.

Those who want to downsize are often looking to move out of the suburbs, to be closer to the city. “They want to take advantage of what the city has to offer… restaurants, theater, museums, gyms, walking places instead of driving. Often they want to stop dealing with landscaping, so they’re looking for smaller outdoor spaces,” says Kennedy.

When Phil and Sheila Johnson (not their real names) moved from their large home in Cambridge, Mass. to a smaller condo, they saved money on landscaping, says Sheila. “The burden of maintenance was gone. There was no mowing, no snow removal. The stress of owning a large home was gone,” she says. It’s been easier to shut the door and walk away if they take a trip, without worrying about what they’re leaving behind.

“It’s in your best interest to plan your lifestyle and figure out what you’re trying to achieve.”

While you can hire a Senior Real Estate Specialist (SRES) to help you – someone who, according to SRES.Realty.com, can help with senior housing options, reverse mortgages, downsizing and using your different savings accounts including pensions and IRAs in real estate transactions – Kennedy’s not sure it’s necessary. Her clients range from 20-80 and she handles the older ones just fine.

Jeffrey Levine, CPA, MST, shareholder of Alkon & Levine, PC in Newton, Mass., says, “It’s in your best interest to plan your lifestyle and figure out what you’re trying to achieve.”

When thinking about downsizing, Levine suggests taking a minute to consider how much room you really need. Don’t sell your house before knowing what you’re looking for. Will you need space for a caregiver? If family comes to visit and you don’t have those extra bedrooms anymore, putting people up at hotels will cost money. And you may have to go out to restaurants for meals.

The Whiteheads’ new home, for instance, has a bedroom for each son when they come home.

Not all downsizing these days is actual downsizing as the housing market is so tight. So you may move from a big house in the suburbs to a smaller condo in the city, but find the condo costs just as much as your house, thus the move is more of a lateral one, says Levine.

Before you even sell your home, you may incur expenses with repair or painting work that needs to be done to make your house marketable.

When you sell your original house don’t forget you’ll be paying the realtor a commission, says Kennedy. In the Cambridge area, that can be as much as 5 percent. In addition, she reminds potential downsizers that condos will require monthly fees. Full service buildings complete with concierge, professional management, and a gym can have very high fees.

Cathy Barrow, 62, and her husband downsized from their 2700 square foot house with a lot of stairs – 23 just to get to the front door – in Washington D.C. three and a half years ago to a condo also in the city, but found that they weren’t condo people, she says. They missed their yard, the birds, and garden. A terrace didn’t cut it. They also discovered they didn’t save that much money on maintenance. The cost of caring for a large home wasn’t much more than the condo fees they were paying, and anytime major work had to be done on their building, they were hit hard.

So they are moving again – this time to a tiny house in a small town 40 minutes north of D.C. They renovated the 1000 square foot home adding 700 square feet, so the master is on the ground floor with a bathroom, and it now has an open living room floor plan – designed so they can grow old in it.

The advantage to the condo was that it was lock and go and easy to leave when they traveled, but Barrow says, “We will travel. We won’t have to spend every weekend taking care of the yard.”

Laura Rodgers, 62, and her husband moved from a five-bedroom suburban home outside of Boston to a two-bedroom condo in downtown Boston. “I love change. I like to expand as a person,” she says. “I have never looked back.”

Levine warns sellers to not be tricked if they’re moving states, such as to Florida where there is no income tax. You still have to pay tax in the original state where you sold your home, like Massachusetts.

Don’t forget the tax burden when you sell a house. “The hidden surprise is that you owe taxes on your house,” says Levine. In 1997, Bill Clinton negotiated with Congress and got a $500,000 exclusion on the sale of your house if married. The exclusion was half that if single. This was to help families downsize, but that amount hasn’t fluctuated the way the real estate market has. There is a federal capital gains tax you will have to pay on the sale of your home. The old rule of rolling over your house into a new house isn’t there anymore. Taxes on your home, after the $500,000 exclusion range between 15-20 percent, and in addition, there is a 3.8 percent investment surtax for Medicare.

Levine warns sellers to not be tricked if they’re moving states, such as to Florida where there is no income tax. You still have to pay tax in the original state where you sold your home, like Massachusetts.  

Levine says storage can be an extra cost if you don’t have room for everything in your new place.

The Whiteheads say don’t forget moving expenses. Whether you’re moving a few blocks like they did, or across country, moving expenses are high, especially if you use movers to pack you, like the Whiteheads did, but it saves on time and headache. See our article on downsizing your possessions-(Link to Downsizing 101 article)

 Don’t forget, your current furniture might not fit in a smaller environment, forcing you to purchase new furniture that’s more appropriate. The Whiteheads sold most of their old furniture and bought new more modern furniture to go with the look of their new home.

Your large house may also be part of your retirement plan, allowing you to draw less on investments when you sell the house.

The good news if you’re looking to downsize, says Levine, is that mortgage rates are low – less than 4 percent. Moving into a smaller house or a condo will also save you money in some aspects as well. Your real estate tax will be less and there will be less utilities to pay.

While Maria Whitehead misses the history she had in her first house, and her sons were sad they were selling, she says, “I’m happy. It’s a great thing. It’s a relief to get rid of stuff. Ultimately it’s better financially for the boys.” She loves being on one level and knows she has planned for her and her husband’s future.

There is no room for sentimentality when you’re downsizing. You need to get rid of stuff.

Another downsizer, Molly Duncan Campbell in Ohio says, “Your kids don’t want antiques, sterling silver, good china, or very much anything in the way of family heirlooms. So get rid of those things!” 

As Barrow awaits the moving truck, she says, there is no room for sentimentality when you’re downsizing. You need to get rid of stuff. She gave as much of her family heirlooms to her relatives as possible. She is excited to move into her new tiny house and to travel more.

Rodgers recommends taking photos of all the sentimental stuff. She reads notes from her kids more on her phone now than she would if they were in a box in the basement.

“The best is we live in a doorman building. I can call him to check to make sure I turned the stove off,” she says. “We can just leave to head to the airport. We travel a lot.”


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About the Writer

Morgan Baker is the Managing Editor for the Bucket and teaches at Emerson College. Her work can be found in Cognoscenti, Motherwell, The Boston Globe and The Martha’s Vineyard Times, among other publications. She can be reached at mbaker@thebucket.com


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