Once the kids have moved out, many homeowners start wondering what they’re paying all those property taxes and utilities for when they’d be just as happy in a smaller house. If you’re looking to downsize your home, here are some common pitfalls that can be avoided with proper planning.
1) One of the biggest adjustments is discovering just how much stuff you have after living in a larger home. It’s amazing what just one closet can hold! I encourage you to think of one key question as you sort through everything. “What would I replace if all of this were suddenly gone?” Obviously this doesn’t apply to sentimental things, but it’ll save you a ton of trouble once you start packing up the Kitchen cabinets and ditch those rarely (or never) used tools and gadgets.
2) Drowning in paperwork? If you’ve been living in a house for decades, odds are you have way more saved than you’ll ever need. You can free up a surprising amount of space just by shredding the excess. If you have credit card statements saved, you can safely toss the year’s accumulation when you get your annual year-end summary statement. Tax records only need to be saved for 3-7 years, depending on how complicated your returns are and if you’re claiming lots of losses.
One record you’ll want to keep indefinitely is anything pertaining to the actual purchase date and cost of stocks. If you ever sell them, you’ll need to be able to prove your cost basis for income tax purposes. And good news – once you decide how much to ditch, there are services which will actually come and shred bulky loads of papers!
3) Are you afraid of missing the extra space, even though you only use it part time? If you’re moving into a condo community, consider balancing community amenities against buying a home with more room. Many communities offer things like exercise rooms or entertaining spaces with kitchens that you can reserve for parties. If you’re a very occasional entertainer or if you don’t mind exercising outside of your home, you can save thousands on that extra square footage!
4) This same concept translates to the outdoors. If you want to give up the yard without giving up the gardening, there are loads of low-maintenance ways to keep your green thumb going. You can join a community garden to get your own patch of land, volunteer at an arboretum or pitch in on planting flowers to beautify your town as a volunteer! You don’t need acreage to enjoy the outdoors. If you just want a bench or a place to walk, pick a home convenient to a park or a community with some outdoors areas.
5) Don’t get surprised at tax time!
Capital Gains: If you’ve lived in a home for a long time, the value has almost certainly appreciated far beyond what you paid. The difference between what you paid and what you get when you sell is considered a taxable profit in some cases, but it’s not quite that simple. The basic info is that single sellers can exclude $250,000 of their gains from taxation, and it’s $500,000 for married sellers. There’s also a residency requirement, though. The home must be your primary residence for 2 out of the last 5 years to qualify for the tax break. There are many more considerations, including improvements you’ve paid for and selling costs, so make sure you have all the info on tax implications as you make a move, and if you’re thinking about moving out of state…
The “Exit Tax”: Many of our state’s seniors opt to be “snowbirds” – keeping their primary residence in a less expensive, warmer state and often returning to their homes less and less frequently as time goes by. Some of you may be thinking it’s time to sell the NJ home now that the market is strong. Not only does this have implications relating to the capital gains residency requirements mentioned above, but you may also have to pay the so-called “Exit Tax” which non-primary residents are required to pay.
This tax is actually an estimated pre-payment on your Non-Resident State Income taxes for the sale of the home, which are calculated like any other investment income. What you paid for your home and any improvements is deducted from the sale price and then you are taxed based on the highest tax rate for that sale year. There is a minimum payment of 2% of your sale price.
Because this is just an estimated pre-payment, you may receive a partial refund once final taxes for the year are tallied, but make sure to plan ahead for that extra 2% or more that you’ll be needing up-front when you sell!