Should I downsize my home in retirement?

Start with what you free up. Example, with made-up numbers: you sell for $450,000 and buy a smaller place for $300,000. That frees $150,000 before costs. Subtract agent fees, closing costs, repairs to sell, and moving. Those can eat a large share of the difference, so price them in your own market.

Next, tax. If you owned and lived in the home for at least 2 of the last 5 years, you can exclude up to $250,000 of gain, or $500,000 on a joint return. You lose the exclusion if you used it on another home sale in the prior 2 years. A gain above the limit is taxable and is reported on Schedule D and Form 8949.

Then compare yearly carrying costs: property tax, insurance, utilities, maintenance, HOA dues, and any mortgage. These matter because they rise with time. In 2023, 43% of homeowners 65 and older with a mortgage spent more than 30% of income on housing, versus 19% of those who owned free and clear, according to Harvard's Joint Center for Housing Studies. Rising insurance costs add pressure even without a mortgage.

Finally, the parts that are not money: stairs, distance to family and doctors, and whether the new place works if your health changes.

What the rule of thumb misses: a smaller home is not always cheaper. A condo with high HOA dues, or a move to a pricier area, can raise carrying costs even after a lower price.