4 Financial Tips for Downsizing a Home

Downsizing and moving to a smaller, less-expensive property may offer several financial advantages that make the decision quite appealing. These financial tips show sellers the benefits of downsizing, with advice to make it more effective.

1. Balance Buying and Selling Costs

One of the most important financial tricks for downsizing is to avoid spending too much profit between the sale of the old property and the purchase of a new home. Selling and buying have specific costs involved that will typically take up a few percentage points of potential profits from the home sale. For example, sellers should pay for:

• Professional photography of the home
• Marketing for the home sale
• Any improvements necessary to ensure a good sale price

People who are looking to move into a new property, in Waterway Village or elsewhere, must also pay for closing costs and moving expenses. Taking both sides of the equation into consideration before selling helps homeowners to figure out where they may safely trim expenses without compromising too much on quality or practicality.

2. Plan for Maximum Benefit

Many people decide they want to downsize for reasons that are not financial, but aiming for a nice profit is a benefit for virtually anyone. Planning for a home sale and a home purchase that guarantee a higher selling price and the lowest reasonable buying price will naturally increase the amount of that nest egg. People who are planning to sell a home and buy another property in the same area may quickly realize that the best time to sell a home is not always an ideal time to buy one, and vice versa. Sellers who want the best buying inventory might choose to buy a smaller home in summer, but prepare to sell their homes a couple months earlier.

3. Consider Cash or Mortgage

Sometimes, sellers can expect such a profit from the sale of their current home that they could consider paying cash for the smaller property. However, they should carefully consider the opportunity costs concerned with taking away funds that could be put to other effective uses. When mortgage interest rates are low, people may choose to get a mortgage and take the tax deduction on mortgage interest. Then, they can use the extra money that they get from the home sale to invest, start a business, or use in another way.

4. Prepare for Capital Gains

Selling a home at a price higher than when it was purchased will involve some evaluation of capital gains tax liability. Sellers who qualify for the capital gains tax exclusion may be able to enjoy most or all of the profits that they get from their home sale, tax-free. In order to qualify for the exclusion, home sellers must have lived in the home for at least two of the past five years. If they have, they may qualify to exclude as much as $500,000 in capital gains (married filing jointly), and $250,000 for people filing single. People who do not qualify for the exclusion, or who can only qualify for a partial exclusion, must pay taxes on their capital gains, typically around 15 percent. Knowing about individual eligibility for the tax exclusion helps sellers to prepare to sell at a time when they are most likely to take advantage of these financial benefits.

Downsizing offers so many financial possibilities that a lot of people use it to dramatically improve their lives. By using these tips, sellers can minimize expenses and increase profits.