Are You Wasting Money by Living in a Home That is Too Big?

One common concern for many people considering a retirement community move is that it will be difficult to downsize their living space. This apprehension about downsizing is understandable for a number of reasons, but there are other important considerations that older adults should factor into this equation and their senior living decisions.

The “too big” home

You’ve likely heard or read news reports about the housing crisis we are experiencing in the U.S. Demand for homes is high, and inventory is low — particularly for affordable housing — which naturally drives up rent and home prices. That, on top of high mortgage rates, makes buying a home out of reach for many, particularly younger adults who are looking for housing for their growing families.

Meanwhile, 77% of people age 50+ continue to say they want to remain in their current home as they grow older — sometimes referred to as “aging in place.” With this, many people are staying in their long-time homes — the home they raised their own family in — despite the fact that they have hundreds, or even thousands of square feet of space they rarely or never use. From a spare bedroom to entire floors, large portions of their home may go unused for weeks or even months at a time.

In fact, a recent analysis of U.S. Census data by senior housing economist Chris Salviati noted that the number of Americans age 65 and older who are living in oversized or “too big” homes is at an historical high. A whopping 8 out of every 10 seniors are living in dwellings with unused spare bedrooms — that accounts for 17% of all owner-occupied housing in the nation.

Is aging in place in a home that is too big “selfish”?

With the countless reports on our housing crisis, there have been some who have argued that older adults who are opting to remain in their current home, even though it is more space than they use or need, are being “selfish.” They suggest that the “ethical” thing for empty nesters with larger houses to do would be to downsize — sell their larger home to a young family that needs more space.

But this issue is much more complex than these pundits might have us think. Of course, there is the fact that many older people desire to maintain their independence and thus want to remain in their current home. Others have close bonds with their neighbors or community that they don’t want to give up. And then there is the emotional nature of selling a home you love, one in which you’ve created so many fond memories. Add to the list those who simply don’t want to deal with the hassles of moving.

But there is another key issue that these commentators may be overlooking and that is the cost of selling a long-time home. First, because home prices are at near-historic highs and mortgage rates are the highest they’ve been in the past decade, the cost difference between the current home and a new smaller home may be negligible. An even bigger issue, however, may be the tax ramifications of selling a home you’ve lived in for many years.

The tax implications of selling a long-term home

The value of many Baby Boomers’ homes has grown exponentially since they purchased them. As a result, they may face a tremendous capital gains tax bill when they sell.

Capital gains taxes are a tax on the profit you make when you sell an investment or asset that has increased in value — and that includes real estate. While a gain of up to $250,000 for a single tax filer (including those widowed or divorced) or $500,000 for a couple filing jointly is exempt from capital gains tax, today’s housing market means many long-term homeowners in certain geographic areas may exceed that profit if they were to sell their home.

A recent CNN article put this financial conundrum faced by many older adults into stark terms. Let’s say a person bought a home in 1987 for $100,000 and has now lived in that home for 37 years. If it is in an area that has experienced tremendous growth in recent years, that home may now sell for $2 million, which is almost $1.9 million in profit. Only $500,000 of that would be excluded from property gains taxes for a couple.

In this example, “the taxable gain of $1.4 million at 20% [capital gains tax rate] would mean those homeowners are facing a $280,000 tax bill. In a state like California with additional tax, the overall payment would be over $450,000,” the CNN article notes. For people who may have counted on their home’s equity to fund their retirement, this math doesn’t make it seem financially advantageous to sell. And it’s also easy to understand why this is such a tough pill for many empty nesters to swallow.

The many costs of remaining in a home that’s too big

There is a flip side to this story, however. There are, of course, costs associated with remaining in a home that is really larger than an older person or couple needs. For instance, a larger house usually means higher property taxes, a more costly homeowner’s insurance policy, and higher utility bills. There are also more interior and exterior upkeep costs that come with owning a larger home.

There are other costs that older adults may not be factoring into the decision to remain in their larger homes, however. One important consideration is safety. A physical ailment or change in mobility — particularly when this occurs suddenly — may make it difficult or impossible to climb stairs, leading to the abandonment of entire upper floors of the home.

For homes that lack a bedroom and bathroom on the first floor, this can be especially problematic or even dangerous. Other safety and accessibility modifications may be needed too like upgrades to lighting and flooring surfaces, wider entryways and halls, and/or lowered counter and cabinet height.

Such modifications to a home to accommodate a change in mobility can be quite costly, however. And this is to say nothing about the potential cost of homecare services necessary to allow someone to safely remain in their current home, which can easily exceed $60,000 each year (an expense that is only going up).

There is yet another reality that some people may not want to consider as it relates to remaining in their current home. It is understandable that downsizing both square footage and possessions can be quite emotional — there are so many memories we associate with our home and belongings. But the fact is, at some point, someone will have to go through your home’s contents and decide what to keep and what to sell, give away, or throw away. The only question then becomes who that person will be: you or your loved ones?

What is the “right size” home?

For some people, having weighed the many pros and cons, the overall benefits of downsizing to a smaller home or perhaps moving to a life plan community or other 55+ retirement community outnumber the benefits of remaining in their current home. So, what is the “right size” home for an older person or couple who is looking to downsize?

Looking at 2023 homebuying data from the National Association of Realtors, we can see the average size of the homes being purchased by different age demographics. For 18- to 23-year-olds, the average size of homes purchased was 1,480 square feet. For 24- to 32-year-olds, it was 1,700 square feet, for 33- to 42-year-olds, it’s 1,820 square feet, and for 43- to 57-year-olds, it topped out at 1,970 square feet, on average.

Thus, the data reveals that from age 18 to 57, the average square footage of homes being purchased goes steadily upward. However, from age 58 on, the average square footage of homes being purchased steadily decreases. The average home purchased by people age 58 to 67 and from age 68 to 76 was 1,800 square feet. For those age 77 up, the average home purchased was 1,600 square feet.

Of course, these are all just averages, so some people in each of these age groups are purchasing larger than average homes while others are buying smaller ones. But of note, for all of these age demographics, the average home being purchased has three bedrooms and two bathrooms. That means even the average empty nester who is downsizing is still purchasing a home that has two spare bedrooms and a spare bath — just smaller ones than the ones in their previous house. That’s still potentially a lot of unused space, which goes back to the issue of spending more than is really necessary on taxes, insurance, utilities, and upkeep.

(It’s worth noting that many older adults use that extra space for storage. Senior living communities thus would be wise to place even more emphasis on storage areas and ample closet space for residents.)

Benefits of smaller homes

If you are considering downsizing, either to a smaller home or to a retirement community, it is worth considering how much space you truly need in order to be comfortable. It can mean big savings not only on the home’s price tag but in the long term when you tally up those monthly and annual homeowner’s expenses (like utilities, maintenance, etc.).

For people who are considering a retirement community, for example, choosing a smaller residence — such as a one-bedroom apartment versus a two-bedroom unit or a patio home — will yield substantial savings. This is particularly true for rental retirement communities and entrance-fee continuing care retirement communities (CCRCs). Any monthly service fee or homeowner’s dues will likely be lower for smaller residences as well.

The beauty of a retirement community is that in most cases, no matter the size of your residence, all residents are able to take advantage of the many benefits that come with living in the community. The services and amenities will be the same for all, but those who opt for smaller residences will have lower overall costs.

And consider too the fact that most retirement communities have beautifully maintained communal spaces. With shared amenities like a clubhouse, pool, library, patios with seating, workout facilities, dining facilities, and even guest suites, in some cases — you simply won’t need a home with as much square footage. You can save substantial money while still enjoying all that the community has to offer!

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