I'm Getting Ready to Downsize. Should I Sell My Home and Just Rent?

Over the past generation, many Americans have changed their attitudes toward renting. In the past, renting was seen as a developmental stage. You rent until you grow up enough, financially and emotionally, to buy a home.

That perception has shifted. Even as far back as 2013, HUD published research noting that "the overall appeal of renting compared with owning is changing" as "Americans seem more willing to embrace renting as an alternative to homeownership."

There are any number of reasons for this. Buying a home has become extraordinarily expensive, taking an average household about 12 years just to save up the down payment. The same goes for owning that home, where an individual repair can cost more than $10,000. Often, it's simply about location. An increasing number of Americans want to live in downtown communities, cities and dense towns where walking is easy, options are diverse, and purchasing options are few. And sometimes you simply don't need that much space anymore.

So, let's say that's you. You're getting ready to downsize from your big house. Should you consider renting? Here are a few things to think about.

You can also get matched with a financial advisor to talk over your decisions including your personal circumstances.

Taxes for Renters vs. Owners

It is very unlikely that renting an apartment will noticeably change your annual taxes.

Selling a house can trigger a one-time capital gains tax event, which is accompanied by a significant tax exemption for individuals who sell their primary residence. This is worth $250,000 per person ($500,000 for married couples) throughout their lifetime. You only pay taxes on any profits above this exemption. So, for example, say that you sell your home as an individual and make $300,000 in profit. You will pay capital gains taxes on $50,000.

Homeowners can also receive a regular income tax deduction for the interest they pay on their mortgage. However, for someone approaching retirement and looking to downsize, it's unlikely that you still pay significant (if any) interest on a mortgage payment. Also, relatively few households actually benefit from this below-the-line deduction.

Beyond mortgage interest, there are few (if any) tax breaks unique to owning or renting. Benefits such as the home office deduction and property tax deductions are available to both owners and renters, so your tax status will not change based on rental status. You might reduce your home office deduction if your office is smaller, but those changes are likely to have a very marginal impact on your taxes. And, while a handful of states offer renter tax breaks, those tend to be geared toward lower-income households and are unlikely to apply to this situation.

In total, beyond the tax event of selling your home, it's unlikely that renting an apartment will change your income taxes in any significant way.

A financial advisor can help you assess your tax strategy. Get matched with a fiduciary advisor today.

Regular Costs of Renting vs. Owning

The costs of renting vs. owning are asymmetrical. A good way to think of it is this: Renting an apartment has fixed costs that tend to increase quickly. Otherwise, owning a house has fixed costs with minimal growth, punctuated by significant unpredictable expenses.

If you sell your home and rent, most (if not all) of your costs will be monthly rent. In most situations this one monthly payment will make up your entire housing budget. While it will range based on your needs, especially if you downsize, a nice apartment in a popular location will generally be expensive . You will also need to anticipate significant annual price growth, as the costs of rent tend to significantly outpace inflation. In some cases, you may be able to find a rent-controlled dwelling in some jurisdictions that cap annual rent increases. These may be a good option to mitigate rising costs.

If you own your home, you will have one monthly payment that includes property taxes, homeowner's insurance, and mortgage payments. These costs will depend on the status of your mortgage, while taxes and insurance will generally grow slowly. If you have largely paid for your home, all of this may cost no more than $ 100 to $ 200 per month.

However, owning a home also comes with periodic maintenance, and that can get very expensive. Even small repairs can cost several hundred dollars, while major problems typically cost four- or five-figures.

For someone approaching retirement, then, the likely balance will be rent vs. maintenance. You will increase your monthly costs and inflation risk by trading a paid-off home for monthly rent. However, you will also eliminate the costs of maintenance and repairs in favor of a largely predictable cost schedule.

A financial advisor can help you make a budget to project rental and home ownership scenarios side by side. Talk to an advisor today.

Lifestyle of Renting vs. Owning

The question here will probably be one of lifestyle. Do you enjoy the autonomy of owning your own home? Do you want to eliminate the costs and stress of maintenance? Where do you want to live?

Because there are many ways to downsize.

If you enjoy owning your own place but simply want a smaller home, then you might want to take the money from selling your big house and put it into buying a smaller one. You will lock down fixed costs and keep landlords out of the equation.

On the other hand, maybe you want to move to a larger community like a city or a walking downtown. In that case, renting will probably be a very strong move. Many of the country's most vibrant communities have very little property available for purchase, and what little there is costs a fortune. In this case, by all means rent. Make sure you plan for how those future costs will integrate with your retirement planning, then enjoy access to the shops, restaurants, bars and people that comes with living in a city.

Because renting isn't just for the kids anymore.

The Bottom Line

Should you downsize to an apartment? The question depends significantly on the lifestyle you want to have. Apartments come with potentially higher, but broadly predictable, fixed costs. Houses have potentially lower fixed costs, but unpredictable and potentially expensive maintenance. But the real question is, what kind of housing is available where you want to live?

Tips On Picking The Right House For You

• Where should you live? It's the be-all question when it comes to choosing a home. After all, the motto is "location, location, location" for a reason. So let's start where the pros do and talk about location.
• A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks .

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