Downsizing: a big decision
Is your place starting to feel too big? Are you thinking of downsizing? Here are some tips to help you figure out the best financial strategy before you make the big decision to move to a smaller place.
"It's important to think about where you're coming from, your current situation and your future needs," according to Angela Iermieri, a financial planner with Desjardins. "It's common for people nearing retirement to realize the benefits of streamlining their space, especially once their kids have flown the nest."
Do more with less
Downsizing is usually a smart move. Some of the factors to bear in mind are taxes and the other costs of owning and maintaining a home, as well as the potential financial gains from selling a property.
"It's financially empowering to be a homeowner, because bricks and mortar tend to appreciate in value over time," Angela points out. "Some people think of their home as a potential source of income when they retire. Others find themselves in more debt than they expected when they get to retirement age and may find it helpful to free up the equity in their home to pay down debt and get their finances back on track. In other words, downsizing for some of us may be more of a necessity than a choice."
Many retirees sell their home and use the money to check things off their bucket list. Some may choose to rent an apartment and travel for a few months a year, while others might prefer to buy a cottage, a condo or a trailer in warmer climes.
How to be tax-savvy
Angela Iermieri encourages homeowners to be mindful of the potential tax ramifications of selling a property. It's a good idea to talk things over with an advisor or accountant. If you own more than one property, you may want to think about which one to designate as your principal residence when the time comes to sell, because the capital gains on that property won't be taxable. It's always worth taking the time to crunch the numbers. "Some choices can have significant impacts," says Angela.
For instance, if you own a second home such as a cottage, it would be wise to explore all the ins and outs of the possible scenarios so you can be savvy about the tax implications.
As Angela points out, "If you own a rental property, remember that the value of the building may have appreciated a lot over time. Even if you live in a unit in that building, 50% of the capital gains on the rented portion will be taxable."
A reminder if you're buying another property
Remember, there are still costs involved in closing a real estate transaction. Transfer taxes and notary or legal fees should all be factored into your financial plan, as well as the cost of hiring movers. Closing costs may be as high as 3% to 5% of the overall outlay for your new property, no matter what its size or price.