I'm a Realtor: 5 Reasons Downsizing Doesn't Always Save Money
Homeownership isn't cheap, and for those wanting to save money, the idea of downsizing sounds pretty appealing.
The thing is, downsizing doesn't automatically equate to savings. Sometimes, what seems like an opportunity to cut costs actually ends up being more expensive in the long run.
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MoneyLion spoke with real estate pros to find out why downsizing isn't always synonymous with saving. Here's what they said.
1. Downsizing for Convenience Can Mean Higher Costs
Not everyone sells their home strictly for the savings. Sometimes, it's about convenience or having access to better amenities -- both of which can increase costs.
"The biggest reduction in savings I see comes from the new location pricing," said Erik Leland, real estate broker at Realty First. "I find that when people sell a larger home to downsize they tend to want something with a higher walk score and a bit nicer neighborhood. The price per-square-foot can jump dramatically even with modest upgrades."
2. Transition Costs Eat Into Savings
Selling your home to buy something new is only part of the equation. There are also those in-between (or transition) costs to consider.
"Between the agent commission, closing costs, title and escrow fees, plus the cost of the move, sellers can burn through 8% to 10% of their sale price just making the change," Leland said. "On a $500,000 sale, that is $40,000 to $50,000 gone off the top."
Keep the new home for a longer period of time -- at least 10 years -- to fully recover these costs, according to Realtor.com.
3. There Are Friction Costs (Like Capital Gains Tax)
The typical monthly mortgage payment was $2,225 for those who moved in 2024, per the latest U.S. Census data available. That's higher than the national median.
If you're paying that kind of money, downsizing into something with a lower mortgage might seem appealing -- at least to your bank account. But there's such a thing as friction costs, which can very easily eat into any savings. One of the big ones is capital gains tax.
"Downsizing is hard because a lot of times sellers have not considered all the 'friction costs' associated with selling and buying," said Jeremy Stein, senior global real estate advisor at Sotheby's International Realty. "And if you are selling a home that has appreciated since you bought (great example being older people who have lived in a home a long time), there could be a capital gain which is subject to an additional tax which can really eat into your profit."
Capital gains tax applies when you sell an asset (like a home) for a profit. There are short- and long-term capital gains, each taxed at a different rate. As per the IRS, the highest capital gains rate is 15% for most people. It depends on factors like your taxable income and filing status, though.
"You want to avoid 'downsizing' into something smaller and not ending up putting away any money because all the extra cash has gone to fees and closing costs and taxes," Stein said.
4. Property Tax Assessments Cut Into Costs
Property taxes vary widely by location and home value. But if you're downsizing to try to shave off a few hundred (or thousand) here, know that you might get hit with a higher tax bill in the process.
"In Oregon, Measure 50 caps assessed value growth at 3% per year. So, homeowners who have been in their house for 10 or 15 years are paying their taxes based on a slowly growing assessed value," Leland said. "When they sell and buy a new place, the new property's assessed value is likely higher than what they had been paying on their old home, and the tax bill can jump significantly."
This is just one example. You could be paying more (or less) depending on your situation and location.
5. HOA and Condo Fees Add Up
For those who "downsize" into something with HOA or condo fees, the new monthly costs might negate any savings. The U.S. Census found that these fees top $500 a month for many U.S. households.
Leland noted these fees can range from around $300 to $600, even for a smaller condo or townhouse. In a year, that's $3,600 to $7,200. In five years, it's $18,000 to $36,000 in costs you might not have been paying before.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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