selling primary home to downsize in retirement

[mjdevito]

I'm not at retirement yet....
However, if I own my current primary home and once I retire I intend to downsize to a smaller, less expensive home and that home is 50% less then the value of my current home at time of sale, what should I consider to minimize the tax burden on that difference, i.e. I'd have 50% leftover. This is not considered a 1031 exchange, true?
Am I missing something related to depreciation of the current home?

ps - for example, if the current home is sold for $1M and the new home is purchased for $500K...

Thank you.

[notanotherusername]

If this is your primary residence and you have lived in it for at least 2 of the 5 years leading up to the sale then you can exclude 250K from capital gains per person. So if titled between a married couple, that is 500K excluded from capital gains and this is not affected by what you then purchase

Also, as a primary residence, there is no depreciation and no 1031 exchange. Capital gain is roughly determined by difference between (sale price - real estate commission) - (original purchase price + costs of improvements of the property). This assumes no home office deduction was taken and no business use of the property along the way.


edit: added 2nd paragraph

[StarTrekDoc]

Primary house: max benefit for couple: 500k. with mentioned 2 of 5 last years living there as a qualifier. -- That's it. Nothing else. So yes, downsizing is very much able to do. -- while you're waiting -- upsize or flip every 500k earnings

[VagabondMD]

I have rarely seen a high income professional downsize into a less expensive home at retirement.

Here's what I have commonly seen:
1. Downsizing into a more expensive home.
2. Moving to a larger, more expensive home.
3. Putting an addition on the current home.
4. Adding a second home.

If you are the rare bird that actually downsizes into a less expensive home, remember that your cost basis is increased by the improvements that you have made along the way.

[Jaqen Haghar MD]

I have rarely seen a high income professional downsize into a less expensive home at retirement.

Here's what I have commonly seen:
1. Downsizing into a more expensive home.
2. Moving to a larger, more expensive home.
3. Putting an addition on the current home.
4. Adding a second home.

If you are the rare bird that actually downsizes into a less expensive home, remember that your cost basis is increased by the improvements that you have made along the way.

Just downsize to a really, really nice place on the water, all redone, with a great view, but smaller square footage..... that should solve the capital gains issues.

[uptoolate]

I have rarely seen a high income professional downsize into a less expensive home at retirement.

Here's what I have commonly seen:
1. Downsizing into a more expensive home.
2. Moving to a larger, more expensive home.
3. Putting an addition on the current home.
4. Adding a second home.

If you are the rare bird that actually downsizes into a less expensive home, remember that your cost basis is increased by the improvements that you have made along the way.

This is what I have seen as well and this is what we are in the process of doing. Place will be smaller but 'nicer' and possibly a more HCOL area so not going to be much difference in cost. The only way I could see having an excess is if someone went to a LCOL area but this is not a common practice. No capital gains on primary residence in Canada so not really an issue anyway. We don't get the mortgage interest deduction here though.

[Tim]

I have rarely seen a high income professional downsize into a less expensive home at retirement.

Here's what I have commonly seen:
1. Downsizing into a more expensive home.
2. Moving to a larger, more expensive home.
3. Putting an addition on the current home.
4. Adding a second home.

If you are the rare bird that actually downsizes into a less expensive home, remember that your cost basis is increased by the improvements that you have made along the way.

Trying. Been trying. Will keep trying. Logic tells me we have captive value and wasted space and expenses. The problem is that I think a change in life event is needed to overcome all the emotional rationalizations.
1. You want the same neighborhood type, just smaller. Not going to happen.
2. What is the alternative? We have leisurely scouted farther out and farther in (urban). Scaling back the neighborhood leaves a sticker shock. Half the house for 80% of price or half the house for 150% of price.
3. I am leaning towards that the geographic arbitrage is probably the key in downsizing.
Not aware of great on the water desirable locations with really really nice redone places in low cost of living areas.
4. A plan to lower your standard of living in retirement is possible, but that is not downsizing.
Life events as well.

Downsizing is not just a smaller house.

Anecdotally, my old estate attorney bought the house next door for cash, 2 days on the market and closed in one week.

[ENT Doc]

I have rarely seen a high income professional downsize into a less expensive home at retirement.

Here's what I have commonly seen:
1. Downsizing into a more expensive home.
2. Moving to a larger, more expensive home.
3. Putting an addition on the current home.
4. Adding a second home.

If you are the rare bird that actually downsizes into a less expensive home, remember that your cost basis is increased by the improvements that you have made along the way.

I am baffled by this. But then again I am baffled by many physician personal finance stories. More than anything, I can understand just staying put in an oversized home that you don't need anymore because "what if the kids want to come home and need a place to stay or bring their families back???" My wife's constant refrain. Well, if that happens I'll rent them a nice hotel room down the street. I'll forgo the Folgers commercial where everyone wakes up peacefully to smells of coffee. No. What really happens is you get woken up from your sleep by your grandchild screaming or from the 3 and 5 year old grandkids fighting downstairs. Nope. Already did that for years. Hotel.

If homes are this alleged "wealth builder" (more agenda pushing than a reality) you want to get the equity out. I think there's a very solid case for a lot of people to just sell, never buy again, and just rent.

[Tim]

I am baffled by this. But then again I am baffled by many physician personal finance stories. More than anything, I can understand just staying put in an oversized home that you don't need anymore because "what if the kids want to come home and need a place to stay or bring their families back???" My wife's constant refrain. Well, if that happens I'll rent them a nice hotel room down the street. I'll forgo the Folgers commercial where everyone wakes up peacefully to smells of coffee. No. What really happens is you get woken up from your sleep by your grandchild screaming or from the 3 and 5 year old grandkids fighting downstairs. Nope. Already did that for years. Hotel.

If homes are this alleged "wealth builder" (more agenda pushing than a reality) you want to get the equity out. I think there's a very solid case for a lot of people to just sell, never buy again, and just rent.

Tried selling that to the wife. There is serious mental block against moving and all that entails. Renting equates to moving. For her, it's not the extra rooms or status.
It is about "her nest" (my wording not hers). In her mind, renting is only a "bridge" (which she did when our current house was being built) to the next "nest". A migration path.

"In fact, the nesting instinct happens across the animal kingdom, with many species preparing a den or a nest to ensure their offspring’s comfort and safety upon arrival. For birds, this looks like meticulously constructing a nest up in the treetops while for other animals it may mean constructing an underground burrow.
For humans it isn’t quite as extreme and every woman’s experience with nesting is unique. It isn’t necessarily about overhauling your entire house before bubs arrives. Sometimes, nesting can be as simple as wanting to spend more time at home."

Mama bear wants her nest and for whatever reason renting is an emotion block. We actually broached this approach for a new location. Rent for 6 months or a year before purchasing. Perfectly acceptable under one condition, not selling the house until we buy a new one. Mama ain't no fool.

[White.Beard.Doc]

My better half is happy in this too large house set on a large piece of property full of gorgeous gardens, prized specimen plantings, and flowers. There is no mortgage, but we live in an area with the highest property taxes in the nation.

Doesn't look like there will be any downsizing in my near future. And our first grandchild will soon be living 5 minutes away. Oh well, go with the flow. Happy spouse, happy house!

[Kamban]

I am baffled by this. But then again I am baffled by many physician personal finance stories. More than anything, I can understand just staying put in an oversized home that you don't need anymore because "what if the kids want to come home and need a place to stay or bring their families back???" My wife's constant refrain. Well, if that happens I'll rent them a nice hotel room down the street. I'll forgo the Folgers commercial where everyone wakes up peacefully to smells of coffee. No. What really happens is you get woken up from your sleep by your grandchild screaming or from the 3 and 5 year old grandkids fighting downstairs. Nope. Already did that for years. Hotel.

If homes are this alleged "wealth builder" (more agenda pushing than a reality) you want to get the equity out. I think there's a very solid case for a lot of people to just sell, never buy again, and just rent.

Maybe when you get to that retirement age you will get it. Right now you are applying logic. Homes and retirement don't work well with logic.

1. At age 70 you don't want the hassles of moving. You have good friends and neighbors and don't want to uproot it all to go a strange place in FL.

2. Housing market has become hot. The house you brought for a low price is now expensive but so are the smaller houses or condos or town homes. You really don't save much.

3. Say you want to move to move to a nice small condo in downtown to have the walkability and all the amenities of downtown. Usually that is in a MCOL or HCOL. . Those condos now cost in the $500K-1M range and cost more than your old house.

4. The supersavers like the people on this board don't care about the extra $500K gained from the sale and downsizing. They have more than enough in other retirement accounts and investments that downsizing does not cross their mind. Like VagabondMD said, I know many who sold their $1M home in NYC metro area and now buy a $2M home on the lake in my LCOL living state. No one really financially downsizes.

[JWeb]

No. What really happens is you get woken up from your sleep by your grandchild screaming or from the 3 and 5 year old grandkids fighting downstairs. Nope. Already did that for years. Hotel.

Eh, no thanks. Nothing would make me happier than my grandkids (in 20+ years) waking me up when they stay with us. Especially if my kids don't live close to us. And my parents and my wife's parents love having our kids around in the am when we stay with them. Making them Minnie Mouse waffles or Mickey pancakes.

No hotels here. . .

[Kamban]

"what if the kids want to come home and need a place to stay or bring their families back???" My wife's constant refrain. Well, if that happens I'll rent them a nice hotel room down the street.

I would not even dare say or think about it if I want to stay married. I am a grouchy but some things are better left unsaid. Vent on this board but at home let the words " yes, dear" come out of your mouth.

Besides in our culture, our friends and relatives stay with us, not in a hotel. Any suggestion to that effect and I might have none visiting me. That is why master bedroom downstairs and multiple guest bedroom upstairs work very well. Unfortunately, COVID has put to crimp to visitation for the past year.

[ENT Doc]

I would not even dare say or think about it if I want to stay married. I am a grouchy but some things are better left unsaid. Vent on this board but at home let the words " yes, dear" come out of your mouth.

Besides in our culture, your friends and relatives stay with us, not in a hotel. Any suggestion to that effect and I might have none visiting me. That is why master bedroom downstairs and multiple guest bedroom upstairs work very well. Unfortunately, COVID has put to crimp to visitation for the past year.

Lol true. I’m all for family living and staying with us. But holding onto an expensive home with high taxes that aren’t giving us the school benefit anymore just seems silly. I say some of the kids screaming stuff in jest. Of course I’d love to see my grandkids running around raising ************************. But those situations are few and far between and meanwhile the tax bill every year at that time will likely be more than we’d pay in rent somewhere reasonable.

[Kamban]

But those situations are few and far between and meanwhile the tax bill every year at that time will likely be more than we’d pay in rent somewhere reasonable.

From your posts I have gathered you are in the early half of your career. You are an ENT. Trust me, by the time the situation arrives that your house will be too big and the grand kid visits are not that frequent, you would have such a good net worth that the tax bill will play an insignificant part on the decision of how you live and spend your money.