The Dilemma of Downsizing: Baby Boomers Confront the Challenges of Moving On

The Burden of Downsizing

For Marta and Octavian Dragos, the prospect of downsizing from their long-time family home in El Cerrito, California, has become a daunting task. After 33 years and raising four children, the Dragos find themselves at a crossroads, grappling with the decision to part ways with their 3,000-square-foot, five-bedroom residence. As empty nesters in their 70s, they are confronted with the challenge of making a wise financial and lifestyle choice in their golden years.

Homes in Pinole, California, US, on Tuesday, Dec. 26, 2023. Sales of previously owned US homes unexpectedly rose in November, led by a pickup in the South and representing a respite in a two-year downturn caused by higher borrowing costs and a lack of inventory. Photographer: David Paul Morris/Bloomberg via Getty Images

The Dragos, like many of their peers, are discovering that the process of selling and downsizing is far from simple. With the soaring value of their home comes the burden of substantial capital gains taxes, a reality that casts a shadow over their plans for a smaller, more manageable abode. Additionally, the scarcity of smaller homes in their beloved neighborhood and the exorbitant prices of available properties pose further obstacles to their downsizing aspirations.

A contractor works on a house under construction at the Toll Brothers Regency at Folsom Ranch community in Folsom, California, US, on Thursday, May 18, 2023.

Despite the allure of a more modest and convenient living space, the Dragos find themselves hesitating to take the leap, recognizing that the financial and logistical challenges of downsizing are far from trivial. Their predicament reflects the broader dilemma faced by many older homeowners who are grappling with the complexities of transitioning to a more suitable and sustainable living arrangement in their later years.

The Taxing Realities of Downsizing

One of the most formidable barriers to downsizing for older homeowners is the burden of capital gains taxes, which can significantly erode the profits from selling a long-held property. For those who have witnessed substantial appreciation in the value of their homes over the years, the prospect of parting with a sizable portion of their gains to the taxman looms large, casting a shadow over their plans for downsizing.

The tax implications of downsizing are particularly acute for homeowners in regions with exponential growth in property values, such as California. As property values soar, so do the potential tax liabilities, leaving homeowners grappling with the sobering reality of diminished returns from the sale of their cherished abodes. The absence of inflation indexing in the tax exclusions further exacerbates the financial strain on homeowners, underscoring the inadequacy of the current tax framework to address the evolving dynamics of real estate values.

The tax conundrum has prompted calls for legislative reforms aimed at easing the tax burden on downsizing homeowners. Proposals for annual inflation adjustments to tax exclusions and increased tax exemptions have been put forth, yet the path to enacting meaningful tax reforms remains fraught with challenges and political inertia. As a result, many Baby Boomers find themselves ensnared in a web of tax complexities, impeding their ability to transition to more suitable and sustainable living arrangements in their later years.

The Elusive Search for Smaller Homes

Another major hurdle confronting Baby Boomers seeking to downsize is the scarcity of smaller homes in the neighborhoods they have long called home. Zoned primarily for single-family residences, these neighborhoods offer limited options for downsizing homeowners, compelling them to confront the dearth of suitable and affordable alternatives to their current abodes.

The dearth of smaller homes, often referred to as the 'missing middle' in housing, has created a conundrum for downsizing Baby Boomers. While some communities are gradually revising zoning regulations to accommodate smaller-scale developments, the pace of change remains sluggish, leaving many Boomers with few viable options for transitioning to more compact and manageable living spaces. The constraints imposed by zoning regulations and the underdevelopment of housing options have further compounded the challenges faced by older homeowners seeking to downsize in familiar and cherished neighborhoods.

In light of these constraints, some Baby Boomers have explored alternative solutions, such as building accessory dwelling units (ADUs) on their adult children's properties. While this presents a potential avenue for downsizing, it is not a panacea for the broader housing shortage facing older homeowners. As the quest for smaller and more affordable living spaces continues, many Boomers find themselves grappling with the stark reality of limited options and the elusive search for a suitable downsizing solution.