Why Downsizing Could Actually Upsize Your Bills

There are plenty of good reasons to move into a smaller home. Saving money isn't always one of them.

U.S. News & World Report

Why Downsizing Could Upsize Your Bills

Couple having a break from packing their home

Sometimes a move can spur lifestyle changes. It could mean longer commutes or dining out more frequently, both of which can be hidden costs to downsizing.(Getty Images)

There are many personal and financial benefits of moving into a smaller home. By downsizing, you can minimize household chores, transition into a more functional space and even reduce your carbon footprint.

However, saving money may not be reason enough to make a move, says David Mele, president of Homes.com, a real estate marketplace. While conventional wisdom says a smaller home should cost less than a bigger home, "There are times when it could have the opposite effect," Mele says. The reality is increased taxes, moving expenses and a new lifestyle could all make trading down more expensive.

With that in mind, here's a closer look at nine reasons moving to a smaller space could translate to bigger bills.

Your home might need updates to sell. It's a seller's market in much of the country, particularly in communities like San Antonio and Tempe, Arizona, but that doesn't mean homeowners won't have to make improvements to sell their property at the desired price. Older homes may have dated decor or deferred maintenance that can be costly to update prior to selling. The home website Remodeling, published by construction firm Hanley Wood, estimates the 2018 national average for a midrange bathroom remodel will cost $19,134, while a midrange kitchen remodel will set homeowners back $63,829.

Long-time homeowners may pay capital gains tax. Those who have lived in their homes for decades may have more to worry about than remodeling costs. That's particularly true for those who bought homes 30 to 40 years ago outside of urban areas such as the District of Columbia and San Francisco. "They may have bought their house for $50,000 and now [it] could be worth $1 million," says Melanie Halstenberg, co-founder of the advisory firm Arch Financial Services in Fayetteville, West Virginia.

For 2018, the IRS will exclude up to $250,000 of a property's profit from capital gains tax for a single taxpayer and $500,000 for a married couple filing jointly. However, that still could leave a significant tax bill. The long-term capital gains tax is as much as 20 percent, depending on the amount of the gain.

Moving is expensive. Once your house is sold, you'll need to cover moving costs. "Packing and transporting can run into the thousands," Mele says. HomeAdvisor, a home services digital marketplace, estimates the cost of a local move to be $800 to $2,000 for a four-bedroom house. A long-distance move may run up to $1,000 a room. Plus, there could be extra costs for packing supplies and the transport of expensive or bulky items. If you're looking to trim moving costs, consider decluttering your home prior to the move, which can lessen transport and reduce overall expenses.

You may have to pay for storage. When you move from a large house to a smaller residence, all your possessions may not fit. Some families may sell the excess items prior to a move, but others may want to keep seasonal or sentimental items even if they don't have a place to keep them at their new house. The self-storage company Life Storage estimates that average costs for a storage unit can range from around $75 to $200 a month. And keep in mind that prices can vary by location, and climate-controlled units can cost more.

A smaller house could be pricey. Just because a house is smaller doesn't necessarily mean it's inexpensive. "I have frequently had people sell huge, beautiful houses in bucolic suburbs near the city and pay more for their new two-bedroom apartment," says Sheila Trichter, an agent with Warburg Realty in New York City.

Plus, newer homes may have updated decor and energy-efficient features that command a higher price even if they come with less square footage. And those moving from rural to urban areas may also find that smaller homes come with higher prices.

You may have new lifestyle costs. Sometimes a move can spur lifestyle changes. It could mean longer commutes or dining out more frequently, both of which can be hidden costs to downsizing. What's more, parents need to think about whether a move will change how their children will get their education.

Vincent Averaimo, a partner with Milford Law LLC in Milford, Connecticut, suggests asking yourself: "If you are downsizing with school-aged children, will they be attending public school or… will private school be more appropriate?" If it's the latter, tuition and transportation costs can add to the price of downsizing.

Property taxes may be higher. A smaller home that is worth more may come with higher property taxes. Even if a new house has the same value as the old house, taxes could increase after a sale. In Michigan, for instance, the taxable value of a home is capped at the rate of inflation. Once a property sells, the cap is lifted and the taxable value is adjusted to equal the assessed value. Meanwhile, in South Carolina, property is only reassessed every five years, and increases in value are capped at 15 percent; however, homeowners are only taxed on 4 percent of the assessed value of their primary residence.

"Property taxes are different in every state," Halstenberg says. Homeowners need to do their research to ensure they understand how their property will be taxed and whether they will be able to comfortably afford the amount due.

Insurance could cost more for your new home. It may seem as though insurance premiums for a smaller house would be lower, but they could be higher, depending on the location. Moving to a coastal area where flood insurance is necessary, for instance, is one example of how downsizing can increase household bills. States such as Florida, Texas and Louisiana that are prone to natural disasters like hurricanes also tend to be home to higher insurance premiums.

Association fees can be pricey. Condos are a popular option for downsizing, but owners typically have to pay a monthly association fee. Those moving into a co-op or planned development may also pay these fees. Averaimo says associations often charge $300 to $400 per month. That money may go toward maintaining common areas as well as providing some exterior maintenance services to property owners.

Before downsizing to a condominium, Averaimo suggests asking yourself: "Do you already spend a total of approximately $3,600 per year in landscaping and snow removal?"

"If you remove the snow yourself and mow your own lawn, the answer is probably no," he says. In that case, consider whether you want to pay extra for these services through the association or if you'd rather buy a property that is not part of an association.

Even if it makes sense to pay a fee initially, Halstenberg cautions that these costs can change. For example, Halstenberg recalls one relative's experience of having association fees rise from $300 to $700 per month over a five-year period.

Downsizing can make sense for many reasons, but it doesn't always lower household expenses. If you're looking to save money with your move, make sure unexpected costs don't catch you by surprise.

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