Tax Considerations When Downsizing or Relocating in Retirement

Retirement is often seen as a time to simplify life, and for many, that means downsizing or relocating to a new home or even a new state. While the thought of shedding excess square footage or settling into a dream location is exciting, it's important to consider the tax implications of such moves. Making informed decisions can help you avoid unexpected expenses and ensure your retirement funds last as long as possible.

The Impact of Moving Out of State

One of the first things you might consider when relocating in retirement is moving to a state with a lower tax burden. California, for example, is known for its high income and property taxes, which can take a significant chunk out of your retirement income. However, even though moving to a state with no income tax, like Florida or Texas, can seem appealing, it's essential to start with the big picture. You may face other costs you hadn’t considered.

Income Taxes: States without income taxes might help you stretch your retirement income further, but keep in mind that they often make up for it in other ways, such as higher sales taxes or property taxes. Understanding how your retirement income—whether from Social Security, pensions, or withdrawals from retirement accounts—will be taxed in your new state is important.

Property Taxes: If you're downsizing, you might assume that your property taxes will decrease along with the size of your home. While that can be true, property taxes vary significantly by state and even by county. In some states, property taxes are the primary source of revenue, and even a smaller home can come with a hefty tax bill. Meanwhile, some states offer property tax breaks for retirees or senior citizens, so it’s worth researching if you qualify for any exemptions in your potential new location.

Sales Taxes: Sales taxes are another factor to consider when relocating. States with no income tax often have higher sales taxes to compensate. This can impact your day-to-day living expenses more than expected, especially if you're on a fixed income. In addition, some states tax necessities like groceries and medicine, while others do not. Understanding the sales tax structure of your new state will help you budget more accurately.

Federal Tax Considerations: While your federal tax burden won’t change based on your state of residence, downsizing or relocating can still affect your federal taxes. For example, if you sell your primary residence, you may be eligible for a capital gains tax exclusion of up to $250,000 for single filers or $500,000 for married couples. However, any gains beyond that amount could be subject to federal capital gains tax. Be aware of the rules to make sure you qualify for this exclusion.

The Hidden Costs of Moving

Beyond state and federal taxes, moving itself comes with costs that can add up quickly. These expenses may not be tax-deductible unless you move for work-related reasons, which is less common in retirement. The costs of selling a home, hiring movers, and settling into a new place should all be factored into your decision.

Another potential hidden cost is the difference in living expenses between your current and new location. For example, while housing might be cheaper in another state, healthcare costs or homeowner’s insurance could be higher. Balancing all of these factors is key to making a financially sound decision.

Special Considerations for Downsizing

If you're downsizing but staying in the same state, you may still face implications with taxes and other costs. Selling your home could result in capital gains taxes, especially if the property has significantly appreciated. Furthermore, if you're moving to a retirement community or smaller home, be aware of homeowners' association (HOA) fees, which can add to your monthly expenses.

Downsizing can also impact your estate plan. If you're selling a large family home and moving into a smaller property, it’s a good time to review your estate plan to make sure it still reflects your wishes and that your assets are protected for your heirs.

Final Thoughts

While downsizing or relocating can offer many benefits in retirement, understanding the tax implications will help you make an informed decision. By evaluating state and federal taxes, hidden costs, and the impact on your overall financial plan, you can make a move that supports your retirement goals.

Navigating the tax implications of downsizing or relocating in retirement can be complex. A financial advisor can help you evaluate the potential costs and benefits as part of your retirement plan. They can also help you plan for the long-term impact of your move, including any estate planning considerations.

Schedule a complimentary, 15-minute chat with a fee-only, fiduciary financial advisor today to discuss your personal situation.

This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.

Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Granite Bay and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.