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What are the financial considerations when downsizing?

Have you reached the stage in life where your kids are out of the house? Or maybe you want to spend less time on home maintenance and more time traveling or pursuing hobbies. Whatever the motivation, downsizing can offer many advantages. A smaller house usually means less upkeep, lower property taxes and utility costs, and a cash windfall from selling your home.

Before making this decision, it's crucial to consider all the financial implications. The following questions can help you figure out how to downsize your home and avoid some common pitfalls.


Is now a good time to downsize?

The U.S. housing market is coming off a year in which home prices rose by 18.8% — the biggest increase in 34 years.1 While rising home prices and mortgage rates may dissuade some buyers, most experts predict the seller's market to continue in 2022.2

You likely won't have trouble selling your old house in the current market but buying a new one could be challenging — especially if you have your heart set on purchasing a particular type of home in a specific neighborhood. Here are three ways to handle that transition.

Make an offer on a new home before selling your house

It's possible to make an offer on a new house before selling your old one. However, try to avoid asking the seller for a “sales contingency," in which the transaction depends on successfully selling your current home. Sales contingencies can be big red flags to sellers3 and could mean having your offer rejected.

A sales contingency may not be necessary if your existing mortgage is paid off, you can swing two mortgages at once, or pay cash for the new home. Talk to your Synovus financial advisor about your options.

Sell your home before buying a new one

When the right house comes along, you may need to move quickly. For that reason, you might consider selling your existing home first and renting while you wait. This might make sense if selling your home would give you enough money to make a cash offer on a new home — or at least allow you to avoid making a contingent offer.

Just keep in mind that it could take a while to identify the right home and have your offer accepted.

Consider a cash-out refinance of your existing home

If you have enough equity in your home to make a cash offer on a new home, consider doing a cash-out refi on your existing home. This allows you access much of the equity that's tied up in your primary residence while still living in the home. You simply need to make the monthly payments on the new mortgage.

Once you find your new dream home you can make a cash offer, increasing your chances of success with getting your offer accepted, even in a hot market. After you close on your new home, you can sell your existing home and pay off the mortgage.

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You can exclude up to $250,000 of capital gains from your taxable income when you sell your primary residence—$500,000 for married couples.

Do you have to pay capital gains when downsizing?

Before selling your home, consider how taxes could come into play.

Under current law, you can exclude up to $250,000 of capital gains from your taxable income when you sell your primary residence.4 Married couples can exclude up to $500,000.

To qualify for the maximum exclusion, you must have owned and used the house as your primary residence for at least two out of the last five years.

There are a few exceptions to this rule. For example, if you move before meeting the ownership and primary use tests due to health reasons, a natural disaster, or other unforeseeable events, the IRS may allow you to take a partial exclusion.5

To calculate the potential gain, subtract your cost basis from the selling price. Your cost basis6 includes:

  • The price you paid for the home.
  • The cost of any significant property improvements.
  • Any costs of selling the home.

For example, say you purchased your home for $300,000 and spent another $150,000 on renovations. You sell the home for $700,000, paying $30,000 in closing costs.

In that case, your basis would be $480,000 ($300,000 + $150,000 + $30,000). That makes your gain from the sale $220,000 ($700,000 - $480,000). Assuming you met both the ownership and primary use tests, you wouldn't have to pay any taxes on the sale since your gain is below the $250,000 exclusion limit.

Just thinking about moving can be daunting, talk to your Synovus financial advisor if you're wondering whether downsizing is right for you. We here to help you think through the details.

Important disclosure information

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

Diversification does not ensure against loss.

  1. S&P Global, “S&P CoreLogic Case-Shiller Index Reports 18.8% Annual Home Price Gain for Calendar 2021," published February 22, 2022, accessed May 6, 2022. Back
  2. Kathy Orton, “Experts predict what the 2022 housing market will bring," Washington Post, published January 10, 2022, accessed May 6, 2022. Back
  3. Knock, “How to buy a house before selling your current home," published February 25, 2022, accessed May 6, 2022. Back
  4. IRS.gov, “Topic No. 701 Sale of Your Home," updated January 24, 2022, accessed May 6, 2022. Back
  5. IRS.gov, “Publication 523: Selling Your Home," 2021, accessed May 6, 2022. Back
  6. IRS.gov, “Property (Basis, Sale of Home, etc.)," updated November 4, 2021, accessed May 6, 2022. Back