2 Ways Downsizing Can Lower Your Property Taxes (And When It Can't)

Downsizing often sounds like a smart move in theory, but when it comes to property taxes, the math isn't always so simple.

Before you assume square footage equals savings, it pays to understand how property taxes really work. Real estate experts explain.

1. Moving To a Home With a Lower Assessed Value in the Same Tax Area

Downsizing reduces property taxes most reliably when you're buying a home with a "meaningfully lower assessed value in the same tax jurisdiction," according to Colton Pace, CEO and founder of Ownwell, a property tax appeal service.

"If both the home's value and the local tax rate are lower, the math is straightforward: a smaller tax base, smaller bill," he said.

However, the biggest savings often show up when you downsize in a market where prices have cooled or where the smaller home isn't in a premium high-tax rate school district or taxing zone. This requires careful research before you move.

2. Moving To a Lower-Tax County or School District

Sometimes location can make a difference in property taxes.

"Moving to a lower county, city or school district's tax rate can produce bigger savings than shaving 300 square feet off your home," Pace said.

Tyler Vaughan, a real estate agent and founder at Tylersellsrealestate.com, advises clients to compare local rates carefully.

"I tell my clients to compare the expected tax rate and any special assessments before they assume the smaller home equals a smaller bill," Vaughan said.

A slightly larger home in a lower-tax county can cost less annually than a smaller one in a high-rate district.

When Reassessment Rules Reset the Clock

There are times when downsizing can backfire, however, such as when buying a new home triggers reassessment at current market value.

"In many states, a home is reassessed at or near market value when it changes hands," Pace said. "That means your tax bill is based on what you paid, not what the previous owner paid."

In states like California and Michigan, where long-time owners may have artificially low tax bills, this can come as a shock, Vaughan said.

Losing Exemptions, Freezes or Assessment Caps

Tax savings, such as homestead exemptions or senior tax-freezes tied to the prior owner, also don't automatically transfer.

"If those benefits don't transfer or if you forget to reapply, downsizing can reduce square footage but not your tax bill," Pace said.

Some states offer portability, however. Florida's Save Our Homes and California's Prop 19 allow certain homeowners to transfer part of their tax benefit, but eligibility and timing rules are strict.

Closing Costs and Transfer Taxes Can Offset Savings

Another way a downsize can cost you is when up-front costs, fees, agent commissions and even moving costs wipe out short-term gains, according to Pace.

"Subtract one-time costs like transfer taxes and closing costs, then compare your full monthly budget," Vaughan said, "based on how long you expect to stay."

Looking Beyond Property Taxes

Property taxes are only one line item. Pace said retirees must also weigh "insurance costs, HOA fees, maintenance, utilities and healthcare access." A move to a state with lower property taxes but higher insurance rates can also cut into any savings.

Before listing your home, run the numbers carefully. Calculate what the new property taxes will be, don't rely on the seller's current bill, Pace advises. In many cases, appealing your current assessment or claiming available exemptions could lower your tax bill without moving at all.

Downsizing can be a great tool for minimizing costs, so long as you're paying attention to all the variables.

This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.