Downsizing in Retirement: What It Really Frees Up, and the Texas Math

Why This Decision Is Bigger Than a Home Sale

For many households nearing retirement, the home is the largest asset on the balance sheet and the largest line in the budget at the same time. That is what makes downsizing different from other retirement decisions. Selling investments changes what a household owns. Selling the house changes what it owns, what it spends, where it lives, and who can fit around the table at Thanksgiving.

The reasons people raise it tend to arrive together. The house is bigger than two people need. The upkeep is more than they want to keep doing. The stairs, the yard, or the distance from a hospital will matter more each year. The kids and grandkids live somewhere else. And the equity tied up in the walls could be doing something for the plan.

Each of those is a real reason. So is the one that argues the other way, which we often raise: a home with plenty of space is where the kids and grandkids come to stay. Adam Van Deusen, writing at Kitces.com, has described a home as something a household consumes as well as an asset it owns, and a plan that prices only the asset is working with half of the facts.

The useful way through is to separate the decision into four numbers and one question. The numbers are the cash a move frees once, the tax on the sale, the change in what it costs to live each year, and what the freed money does next. The question is what the house is for.

What a Downsize Actually Frees Up

Take a hypothetical Texas couple, both 67, who own their home outright. They bought it in 1999 for $330,000, put $80,000 into improvements over the years, and could sell it today for $950,000. They have found a smaller home nearby for $600,000 and would pay cash.

The sale costs money. Agent commissions and title and closing costs come off the top. We assume 7% of the price here, or $66,500. Concessions to a buyer, where a sale needs them, would add to that. Commissions are negotiable and every sale is different, so it is worth asking for an estimate in writing before deciding, but the number is rarely small.

So does getting there. Getting a long-lived-in house ready to sell and moving out of it has a cost: repairs the inspection turns up, staging, movers, storage. We assume $20,000.

The next home is not free of costs either. A cash purchase skips the lender’s fees but still has closing costs, assumed here at $6,000, and almost nobody moves into a new place without changing something. We assume $25,000 for updates and furnishing.

Put in order, the $950,000 sale price becomes $883,500 after selling costs, $863,500 after preparing and moving, $263,500 after buying the next home, $257,500 after its closing costs, and $232,500 after settling in.

The price gap between the two homes is $350,000. The cash that reaches the plan is $232,500, about two thirds of it. The $117,500 difference is the cost of making the move, and it is the first number most back-of-the-envelope versions of this decision leave out.

Two things change this picture quickly. A mortgage on the current home comes out of the proceeds before anything else, so a household still carrying one frees less cash and, in exchange, sheds a monthly payment. And a smaller price gap can disappear entirely: selling at $950,000 and buying at $800,000 would leave about $32,500 after the same costs. A move like that can still be the right one. It is a move to a home that fits better, though, and is better planned as that, because it frees almost nothing.

The Tax on a Long-Held Home

The federal tax code treats the sale of a home more gently than almost any other sale. Under Section 121, a homeowner can exclude up to $250,000 of gain, and a married couple filing jointly up to $500,000, if they owned the home and lived in it as their main home for at least two of the five years before the sale. For the joint amount, either spouse can meet the ownership test, both have to meet the use test, and neither can have used the exclusion on another home in the prior two years.

What counts as gain. Gain is the sale price, less selling costs, less the home’s basis: what it cost, plus capital improvements such as an addition, a new roof, or a remodeled kitchen. Ordinary repairs and maintenance do not count. Our couple realizes $883,500 after selling costs against a basis of $410,000, for a gain of $473,500. That is inside the $500,000 exclusion, and they owe no federal tax on the sale. Texas has no income tax, so for them the federal answer is the whole answer.

The exclusion has not moved since 1997. The $250,000 and $500,000 amounts were written into the law in 1997 and have never been adjusted for inflation. Bills that would raise the limit or index it to inflation have been introduced in Congress, and as of November 2026 none has become law. Home prices have not held still. The result is that long-time owners, the people most likely to be thinking about downsizing, are also the most likely to have a gain larger than the exclusion. Our couple came within $26,500 of it on a home they bought for $330,000. That is also the practical reason to keep records of improvements for as long as you own a home: every documented dollar of improvement is a dollar of gain that never needs the exclusion.

What a gain above the exclusion costs. Consider a second hypothetical couple, also both 67, selling a Hill Country home on acreage for $1,500,000, with all of the land used as part of the home. They paid $280,000 in 1994 and have $170,000 of improvements, for a basis of $450,000. After $105,000 of selling costs they realize $1,395,000, a gain of $945,000. The exclusion covers $500,000 and leaves $445,000 taxable.

Apart from the sale, their adjusted gross income is $137,500 a year, from a pension, IRA withdrawals, and the taxable part of their Social Security, which is already at the 85% maximum. In a normal year their deductions are $47,500 (the $32,200 standard deduction, $1,650 each for being 65 or older, and the $6,000 senior deduction for each of them), which leaves $90,000 of taxable income. In the year of the sale, four things happen. The $445,000 of gain is taxed at the 15% long-term capital gains rate, $66,750. The 3.8% net investment income tax applies to the part of their $582,500 of modified adjusted gross income above $250,000, which is $332,500, adding $12,635. Their income is now far past the $250,000 level where the senior deduction is fully phased out, so they lose all $12,000 of it for the year, which adds $1,560 of tax on their ordinary income. And because Medicare sets its premium surcharges from income two years back, their 2026 income raises their 2028 premiums: at the 2026 surcharge amounts, an income in that tier adds $529.60 a month per person for Parts B and D (the Part D piece applies to anyone with Medicare drug coverage), or about $12,710 for the two of them for the year. The 2028 tiers and amounts will differ somewhat.

Together that is $80,945 of added federal tax and roughly $12,710 of Medicare surcharges, about $93,655, or 21% of the taxable gain. The stated rate on the gain was 15%. The rest came from the three other rules the same income set off, which is why we lean toward pricing a sale like this in a multi-year projection, as one number that moves the brackets, the surcharges, and the deduction at once. Our articles on the Medicare surcharge and the senior deduction cover the surcharge and the deduction in full. The comparison that belongs next to this number is what keeping the home would mean: if the home is community property, under the rule described below, a later sale by the survivor would be taxed only on growth after the first death. One point on the surcharge: Social Security will recalculate it after certain life-changing events, such as retirement or the death of a spouse, but a gain on the sale of a home is not on that list.

Acreage is its own question. The exclusion covers a home and the land used with it as a residence. It does not cover gain on a part of the property that is separate from the house and used for something else. Under the regulations, when part of a property is used as a home and a separate part for business or other non-residential purposes, the gain has to be divided, and only the residential share can be excluded. For a place in the country, that means pasture leased for grazing or land run as a ranching business is not automatically inside the exclusion just because the house sits on the same deed. Land next to the house that the family used as part of the home can qualify, including when it is sold separately within two years of the house, but the two sales share one exclusion. How a particular property divides is a question for a CPA before the listing, since the answer changes the price a seller needs.

A surviving spouse. A widow or widower who sells within two years of a spouse’s death, and has not remarried, can still use the full $500,000 if the couple would have qualified just before the death. In Texas there is usually a second and larger protection. When a home is community property, both halves of it receive a new basis at the first death, equal to its value then, so a survivor who sells later is taxed only on the growth since. Our article on the step-up in basis in community property states walks through that rule and how it differs elsewhere, which matters for the many families who retired to Texas from a common-law state or own a home in one.

Three smaller points. A home that was rented out for a time carries rules of its own, covered in our article on converting a home to a rental. Depreciation taken on the home after May 6, 1997, for a rental period or a home office, is not covered by the exclusion, as our article on depreciation recapture explains. And a loss on the sale of a personal home is not deductible.

Texas Property Tax on the Next Home

Texas has no income tax and leans on property tax instead, with rates that run higher than in most states and vary widely from one county, city, and school district to the next. For a homeowner 65 or older, the bill on the next home depends on four rules that do not all behave the same way in a move. Our article on Texas property tax at 65 covers the exemptions and the ceilings in depth; this is what happens to them when you sell and buy.

The school exemption follows you anywhere in Texas. The $200,000 school district exemption for homeowners 65 and older ($140,000 for every homestead plus $60,000 more at 65) is available on any Texas homestead, with a new application at the new appraisal district.

The school tax ceiling moves as a percentage. The over-65 freeze on school taxes does not carry over as a dollar amount. What carries over is the share of the unfrozen tax you were paying. If the ceiling on the old home was 80% of what the school tax would have been without it, the ceiling on the new home starts at 80% of what its school tax would otherwise be. The transfer takes a certificate from the old appraisal district, filed with the exemption application on the new home.

Local freezes stay local. A county, city, or junior college district that has adopted its own freeze honors it only for a move within that same county, city, or district.

The appraisal limit starts over. Texas limits how fast a homestead’s appraised value can rise to 10% a year. That limit does not travel. The next home is appraised at its market value, and the limit begins again only after its first year as your homestead. A long-time owner whose appraised value has trailed the market gives that up in a move.

The effect is that the property tax bill does not simply follow the price. In the example below it falls 41% on a home that costs 37% less, because the $200,000 exemption covers a larger share of a smaller home. For a long-time owner whose appraised value has trailed the market, the drop can be much smaller, and in some moves the bill barely changes. We lean toward putting the tax ceiling into a downsizing or relocation decision as a number rather than a reason: staying in a home that no longer fits to protect a ceiling, and leaving one without knowing what the move costs in property tax, are both decisions made without the number that should inform them. And nothing moves past the state line. A household leaving Texas trades this whole system for another state’s, often with an income tax attached; our checklist for moving to Texas covers the same trade in the other direction.

Moving to land. Some households retire in the other direction, from a house in town to a place with acreage. Two property tax rules matter most there. The homestead exemptions and the over-65 ceiling apply to the house and up to 20 acres used as the home. And open-space agricultural appraisal, the kind most Texas agricultural land carries (wildlife management is a form of it), values qualifying land on what it can produce instead of what it would sell for. It belongs to the land’s use, and a new owner has to apply for it. If land that has been receiving it is taken out of agricultural use, the owner owes an additional tax equal to the difference for the previous three years. When clients make this move, we lean toward working through the exemptions and how the land and any ranching activity are owned alongside their CPA and attorney before closing, and our article on Hill Country retirement planning covers the wider picture.

The Yearly Math: What It Costs to Live There

The one-time number gets the attention. The yearly number can do more of the work, and it is one we walk through with clients alongside the one-time number: what it costs to live in the current home each year, what it would cost in the next one, and what the difference would do if it went somewhere else.

For our first couple, assume a school district rate of $1.00 per $100 of value and other local taxes (county, city, and special districts) of $0.85 per $100 combined, with no local exemptions or freezes. These are illustrations, not any particular place.

Property tax. On the $950,000 home, school tax without the ceiling would be $7,500 (the rate applied to $750,000 after the $200,000 exemption), and their ceiling is $6,000, or 80% of it. The other units add $8,075. Total: $14,075. On the $600,000 home, school tax without the ceiling would be $4,000, the ceiling that moves with them is 80% of that, $3,200, and the other units add $5,100. Total: $8,300. The move saves $5,775 a year in property tax, a drop of 41%. This example treats the current home as appraised at its market value; an owner whose appraisal has been held below market by the 10% limit would save less.

Insurance, utilities, and upkeep. We assume homeowners insurance falls from $6,400 to $4,300, utilities from $6,500 to $4,200, and maintenance and repairs from $11,000 to $6,000. Not every line falls. The next home is in a neighborhood with an owners’ association, which adds $1,200 a year the old one did not have.

In all, the current home costs $37,975 a year to own and the next one $24,000. The difference is $13,975 a year, about $1,165 a month.

What a yearly number is worth. A lower cost of living is worth more than it looks, because every dollar a household does not need to spend is a dollar its savings do not need to produce. How many dollars of savings that is depends on how the plan handles spending. When someone asks for a ballpark before any modeling, the rough sketch we lean toward is about 4% of the portfolio for a plan that will never adjust and about 5.5% for one that will follow guardrails. That sketch starts a conversation; it is not a rule of thumb and never a plan. On it, $13,975 a year of spending takes about $349,000 of savings to support at 4% and about $254,000 at 5.5%. Our articles on the 4% rule and on retirement spending guardrails explain where those two figures come from and why a plan that adjusts can start higher.

Set the two results side by side. The move frees $232,500 of cash once, and it removes a cost that would have taken roughly $254,000 to $349,000 of savings to cover. For this couple, the lower cost of living does more for the plan than the cash, and on that same rough sketch, the two together are comparable to having something like $487,000 to $582,000 more in savings. A household that looked only at the proceeds would have seen less than half of what the move does. A household’s real figures come from its own plan.

What that money can do instead. This is where the math turns back into life. A plan that needs roughly $254,000 to $349,000 less can mean retiring earlier. Or the retirement date can stay where it is and the $13,975 a year can go to something else: travel, trips with the grandkids, giving. One trade we talk through is the hosting one. A family that keeps a large home partly so everyone can gather could instead own a smaller place and spend part of the savings renting a house, once or twice a year, where the whole family comes together. On the Kitces & Carl podcast, Carl Richards passed along what he called an old Stephen Covey saying: asking someone to say no works only when the no is connected to a bigger yes. The yearly number is how a household finds out what its bigger yes could be.

The other side of that trade. It deserves an honest hearing, because it gets stronger with age. Travel is easiest in the early years of retirement and usually gets harder. A plan that swaps the hosting house for trips works well while everyone is able to go, and less well later, when the grandparents would rather the family came to them. A home the family already knows how to gather in keeps working after travel stops. Spending also tends to change with age in ways that matter here, as our article on the retirement spending smile describes. Neither side of this wins on the numbers. It is a question about how a particular family wants to be together, at 70 and at 85, and the numbers are there to show what each answer costs.

What to Do With the Equity

The cash a downsize frees has three common destinations, and many households use more than one.

Invest it. Proceeds added to the portfolio raise what the plan can sustainably spend and give. On the same rough sketch as above, $232,500 supports about $9,300 a year of spending and giving at 4% and about $12,800 at 5.5%. Invested money also stays liquid, which a house never is.

Pay cash for the next home. For a household that would otherwise borrow, using the equity to buy the next home outright removes a mortgage payment from the retirement budget. In a 2023 Kitces.com article, Van Deusen also pointed out that a homeowner with substantial equity may be able to buy a smaller home for cash and avoid a new mortgage, and that when two homes rise by the same percentage, the larger one gains more dollars. We would add that this is part of why long-time owners of larger homes are often able to pay cash.

Pay off other debt. Some households use part of the proceeds to clear what remains of other debts and enter retirement debt free or close to it. A lower fixed cost of living makes a plan easier to adjust when markets fall, because there is less that has to be paid no matter what.

We have no standing lean among these. Whether to carry a mortgage on the next home or pay cash depends on the interest rate, on how much liquidity the household keeps afterward, on taxes, and on what the invested money can reasonably be expected to earn, and those differ for every household. A candid note on our own interest: for the investments we manage, we charge a tiered asset-based fee, so advice to invest the proceeds raises our fee and advice to pay cash for a home or pay off debt does not, which is one more reason those decisions belong in numbers rather than impressions.

What the house was also doing. The other side of the ledger is the house itself. A smaller home is a smaller reserve to borrow against later or to leave to heirs, and the $117,500 the move cost is spent either way.

Timing the two closings. Buying before selling avoids a double move but requires the money for the next home before the old one has sold. Some households bridge the gap with a home equity line on the current home, opened well ahead of time. Because a lender can freeze a line, a purchase that depends on one needs a second way to close. Our article on home equity lines and reverse mortgages in Texas covers how those lines work and the Texas rules for them.

Rent or Buy the Next Place

Most of our clients who downsize buy the next home. Renting it is a real alternative, and we lean toward treating it case by case.

Buying fits a household that knows where it wants to be and expects to stay. It keeps housing costs more predictable, and in Texas it keeps the over-65 exemptions and the school tax ceiling. Renting fits a household that is not sure yet: one moving to a new city to be near children who may move again, or one that may need a different kind of housing within a few years. A sale and a purchase each carry costs like the ones in the first example, so a home held only a short time can cost more than renting it would have. Renting for a year in a new area before buying is a common middle course, and it turns a guess about a place into experience of it. In Texas, a period of renting does not by itself give up the school tax ceiling percentage: the law sets no deadline, and the percentage applies to the next homestead once one is bought and qualified.

A reverse mortgage can also be used to buy. Since 2013, Texas has allowed a reverse mortgage to help purchase a new homestead, which lets a household 62 or older put part of its sale proceeds into the next home and keep the rest for the plan, with no required monthly loan payment (property taxes, insurance, and upkeep still have to be paid). It is expensive to open and suits some situations far better than others, and our article on home equity lines and reverse mortgages, linked above, covers how it works.

When the Answer Is to Keep the House

Sometimes the planning question that looks like “should we sell the house” is really a different question, and the house is only the most visible asset.

One household we worked with (some details are changed here to protect their privacy) had most of its net worth in things that are hard to spend: a business they were selling, a quadplex, a beach house, and their home. They wanted to retire, and to do it they needed lower expenses and more liquidity. They were sad about selling the home but thought it was necessary. It was where they had raised their kids. It had plenty of room for their kids and grandkids to all gather together. Their best friends lived next door.

So we walked through what it would take to keep it. That meant helping with the sale of the business, reviewing the numbers on the quadplex, and looking at the beach house, which they had bought with the intent to sell at retirement as a retirement asset anyway. They kept the home.

The lesson is narrow but worth stating. They needed liquidity and a lower cost of living, and the home was one of four illiquid assets on the table. It was also the one they were sad to give up. When the real problem is liquidity, we lean toward looking first at the assets that were always meant to be turned into retirement money (a business being sold, investment property, a second home bought for that purpose) before a home the family wants to keep. Home equity can also be reached without selling. A line of credit is a backstop that has to be repaid and can be frozen, and a reverse mortgage is one we lean toward keeping in the back pocket, case by case.

The reverse case is just as real. For a household whose wealth is mostly in the house and whose savings cannot carry the plan, selling may be what makes retirement work, and the kindest thing a plan can do is show that clearly and early, while there is time to choose the next home well.

How We Think About It

We lean toward modeling this decision two ways at once, staying and moving, on the household’s own numbers, with no default answer. Each version carries the one-time math (what the sale actually frees after costs and tax), the yearly math (what each home costs to live in, line by line), and what the freed money does next, whether that is investing it, paying cash for the next home, or clearing other debt. For the couple above, that meant $232,500 freed once and $13,975 a year less to live on, set next to a plan for staying. Seeing the two plans next to each other is usually what settles it, because the proceeds alone can make a move look either better or worse than it is.

We lean toward asking what the house is for before the math decides anything. Room to host kids and grandkids, the neighbors, the years a family has put into a place: those belong in the decision, and they are the reason a client’s Statement of Financial Purpose comes before the spreadsheet. The numbers then show what each choice costs, which is a different job from making the choice.

We lean toward putting the tax on the sale and the property tax on the next home into the decision as numbers rather than reasons. A gain above the exclusion gets modeled in the multi-year projection with the Medicare surcharge and the senior deduction included, next to what keeping the home would mean for basis later. The school tax ceiling gets carried to the next home at its percentage. Each is one input, known before the household decides.

Rent or buy is case by case, and most of our clients buy. And when the real need is liquidity, we lean toward looking at the other illiquid assets before a home the family wants to keep.

The honest trade-off is that this takes more work than a rule would, and it sometimes ends with the answer a household was not hoping for. A plan can show that the house a family loves costs more than the retirement they want, or that a move they had settled on frees almost nothing. We would rather a household learn that from a model than from a closing statement.

Common Questions

Does downsizing in retirement actually save money?

Downsizing in retirement can save money, but it frees less cash up front than the price gap suggests and can lower yearly costs by more than people expect. In our example, selling a $950,000 home and buying a $600,000 one frees $232,500 after selling costs, moving, and settling in, and lowers the yearly cost of the home by $13,975. We lean toward modeling both numbers, on the household’s own figures, next to a plan for staying.

Do you pay capital gains tax when you downsize?

Many homeowners who downsize owe no capital gains tax, because up to $250,000 of gain on a main home, or $500,000 for a married couple filing jointly, can be excluded after owning and living in it for two of the last five years. Gain above that is taxed as a long-term capital gain, and it can also set off the 3.8% net investment income tax, a higher Medicare premium two years later, and the loss of the senior deduction for that year.

Does the over-65 property tax freeze transfer to a new home in Texas?

In Texas, the over-65 school tax ceiling transfers to a new home as a percentage, not a dollar amount. If the ceiling on the old home was 80% of the school tax that would otherwise have been due, the new home’s ceiling starts at 80% of its school tax. A county, city, or junior college freeze transfers only within the same county, city, or district, and the 10% appraisal limit starts over on the new home.

Is it better to pay cash for the next home or keep a mortgage?

Whether to pay cash for the next home or keep a mortgage depends on the interest rate, how much liquidity the household keeps afterward, taxes, and what the invested money can reasonably be expected to earn. We have no standing lean. Paying cash lowers the fixed cost of retirement; investing keeps the money liquid and working. We lean toward modeling both on the household’s own numbers.

Should retirees rent or buy after selling their home?

After selling a home in retirement, buying the next one suits a household that knows where it wants to be and expects to stay, and in Texas it keeps the over-65 exemptions and the school tax ceiling. Renting suits a household that is still deciding, since the costs of buying and selling can outweigh the benefits over a short stay. Most of our clients buy, and we treat it case by case.

How much less do you need to retire if you downsize?

How much less a household needs to retire after downsizing depends on how much the move lowers the yearly cost of living and on how the plan handles spending. When someone asks for a ballpark before any modeling, the rough sketch we lean toward is about 4% of the portfolio for a plan that will never adjust and about 5.5% for one that will follow guardrails. On that sketch, each $10,000 a year of lower spending is about $182,000 to $250,000 less in savings. That sketch starts a conversation; it is not a rule of thumb and never a plan.