The downsizing math trap
The price gap isn’t your cash.
Run it before you list. Some moves free up a fraction of the gap; a few cost cash.
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1. Run your real numbers
2. Where the money leaks
- Selling costs. Agent commission plus the seller’s closing costs commonly run 6% or more of the price.
- The mortgage. Whatever you still owe comes off the top.
- Buying again. Closing costs on the new home, inspections, and the move itself.
- A narrower gap. Smaller homes in desirable areas often cost more per square foot, and new condos add HOA fees.
- Taxes above the exclusion. Gain beyond $250,000, or $500,000 for a married couple, is taxed — see the 0% capital gains bracket.
3. When it still makes sense
Downsizing often wins on the monthly side: lower utilities, insurance, property taxes and upkeep, and a home you can live in as you age. Count those, not just the check at closing. The full decision is in downsizing your home in retirement, and the alternatives are in tapping home equity.
4. Frequently asked questions
Why doesn’t downsizing free up as much cash as expected?
Because the price gap between the two homes is not the cash you keep. Selling costs, paying off the mortgage, closing costs on the new home and moving all come out first, and smaller homes in the same area often cost more per square foot.
Do I pay tax when I sell my home to downsize?
Usually not much. If you owned and lived in the home for at least two of the last five years, you can exclude up to $250,000 of gain, or $500,000 for a married couple filing jointly. Gain above that is taxed as a capital gain.
When does downsizing still make sense?
When the goal is lower upkeep, a single-level home, lower utility and property tax bills, or living near family. The monthly savings can matter more than the one-time cash.