Why You Shouldn’t Downsize Your Silicon Valley Home in Retirement

I’m sure you’d expect a REALTOR® to tell you to sell your house: after all, that’s how we earn a living, and the bigger and more valuable the home, the bigger the payday when it changes hands. So when I tell you that downsizing in retirement is often the wrong move, I hope you’ll take it seriously, because I’m arguing against my own short-term interest here.

I’m a Silicon Valley REALTOR® who has spent years working with long-time homeowners in their sixties, seventies, and eighties. I’m also a Certified Aging in Place Specialist (CAPS), a designation from the National Association of Home Builders, and I earned it because I’ve come to believe that for a huge portion of older adult homeowners, staying in the home they own for the long term is the smartest play available to them, both financially and personally.

That’s not the message you’ll hear from most corners of the financial world. Financial planners love to recommend downsizing, and on the surface the logic seems airtight. Housing is the biggest expense for most retirees, your home has appreciated for decades, so sell the big house, buy something smaller, pocket the difference, and ride off into the sunset. The Urban Institute reports that the number of older households spending more than half their income on housing has nearly doubled over the past twenty years, so the pressure to do something is real.

But here’s what I’ve learned after years at kitchen tables with families making this exact decision: the downsizing math rarely works the way people think it will, and the costs that don’t show up on a spreadsheet are often the ones that hurt the most. Let me walk you through why.

The Cost of Selling Is Higher Than You Think

I always tell my clients that in real estate, you make your money when you buy, and you only realize the cash when you sell. What I have to remind them is that realizing that cash is expensive.

Between agent commissions, title and escrow fees, transfer taxes, staging, and the pre-sale renovations and repairs that nearly every long-held home needs before it hits the market, you can easily spend 6 to 7 percent of your property’s value just to get it sold. Zillow puts the figure even higher, estimating that sellers should budget 8 to 10 percent of the sale price for total selling costs. On a $2 million Silicon Valley home, that’s somewhere between $160,000 and $200,000 gone before you’ve bought anything new or moved a single box.

And that’s just the transaction itself. You’ll also pay to move, pay to furnish spaces that your old furniture doesn’t fit, and pay closing costs on the purchase side too. These aren’t reasons never to sell. They are reasons to make sure the move you’re making is worth six figures in costs, because that’s what it usually amounts to in high-cost markets like ours.

The Capital Gains Tax Trap

This is the one that stuns people. The federal capital gains exclusion on a primary residence is $250,000 for a single filer and $500,000 for a married couple, and those figures haven’t budged since 1997. Meanwhile, home values in places like Silicon Valley have gone up five, eight, sometimes tenfold over that same stretch. If you bought your home in Cupertino or San Jose in the 1980s for $200,000 and it’s worth $2.5 million today, the exclusion barely makes a dent in your gain.

Here in California, between federal capital gains tax, the state’s treatment of gains as ordinary income, and the net investment income tax, long-time Bay Area owners typically end up handing over roughly 30 percent of their taxable gain. I’ve sat with couples who discovered that downsizing would cost them $300,000, $400,000, or more in taxes alone. When you stack that on top of the selling costs we just discussed, the “windfall” from downsizing starts looking a lot thinner.

Now here’s where it gets even more interesting, and where holding on can become a powerful estate planning strategy.

The Stepped-Up Basis: Why Waiting Can Save Your Family Hundreds of Thousands

If you’re married and your spouse passes away, you’ll likely receive a stepped-up basis on the home. In California, a community property state, the surviving spouse typically gets a full step-up on the entire property, meaning the home’s tax basis resets to its current market value. Sell after that, and your capital gains bill is somewhere in the neighborhood of zero.

The same logic applies to your children. If there’s no surviving spouse, your estate inherits the property at that stepped-up basis, and in most cases your kids can sell the home essentially tax-free. Compare that to selling today, paying 30 percent of your gain to the government, and leaving your heirs whatever’s left.

I’m not a CPA or an estate attorney, and you should absolutely run your specific situation past one before making any decisions. But I can tell you that once families understand the stepped-up basis, the urgency to downsize often evaporates. Sometimes the most expensive thing you can do with a highly appreciated home is sell it a few years too early.

Change Happens

Your Current Home May Be the Better Investment

Real estate works best as a long-term investment, and generally speaking, the longer you hold a property, the better it performs as an investment vehicle. That principle doesn’t stop applying just because you’ve retired.

Here’s what many downsizers overlook: the home you’d move into often appreciates more slowly than the one you’d leave behind. Age-restricted 55+ communities are the classic example. Because the pool of eligible buyers is limited by definition, these homes frequently appreciate at much lower rates than comparable homes without those restrictions. So you’d be trading a relatively strong-performing asset for a weaker one, paying enormous transaction costs and taxes for the privilege.

Then there are the HOA fees. Many 55+ communities and condo developments carry monthly dues of $500, $800, sometimes well over $1,000 (like The Villages in San Jose), and those fees only move in one direction over time. Add in the special assessments that hit when the community needs a new roof or repaved roads, and the “lower cost” of that smaller home starts to look like an accounting illusion. You haven’t eliminated your housing costs, by any means. You’ve just converted them into a different form, one you no longer largely control.

The Property Tax and Mortgage Rate Problem

If you’ve owned your California home for decades, Proposition 13 has been quietly working in your favor the entire time, capping the growth of your assessed value so that your property tax bill is likely a fraction of what a new buyer would pay on the same house. Proposition 19 does allow homeowners 55 and over to transfer their tax base to a new home, which helps, but the mechanics get complicated when you’re buying in a different price range, and plenty of downsizers still end up with a higher tax bill than they expected.

Mortgage rates tell a similar story. Redfin reports that 54 percent of baby boomer homeowners own their homes free and clear, and most of those who do still carry a mortgage locked in remarkably low rates, many below 3 percent during the pandemic refinancing wave. With 30-year rates sitting around 6.5 percent today, any downsizer who needs new financing is trading cheap money for expensive money. If your smaller home comes with a new mortgage at today’s rates, the monthly savings you were counting on can disappear entirely.

The Costs That Never Show Up on a Spreadsheet

Everything I’ve covered so far is about dollars, but after years of doing this work, I can tell you the emotional side of the ledger matters just as much, and sometimes more.

A 2024 AARP report found that 75 percent of Americans over 50 have a strong preference for staying in their current home as they age, and 73 percent want to remain in their communities. Those aren’t sentimental numbers to brush aside. They reflect something real about how we’re wired.

Your long-time home is where the family still gathers. It’s the guest room your grandkids sleep in, the backyard where the holidays happen, the space that keeps everyone coming back. I’ve watched retirees downsize and then regret the loss of the home that made them the hub of the family. When the house with the extra bedrooms goes away, the visits often get shorter and less frequent, and that’s a cost no spreadsheet captures.

There’s also the matter of familiarity. You know your home’s quirks, which closet door sticks in the summer and which window leaks when it rains hard. A new home is a world of unknowns, and unknowns often cost money, which is particularly painful on a fixed income. Your current community comes with decades of accumulated infrastructure too: your doctors, your neighbors, your church or synagogue, the pharmacist who knows you by name. Research consistently shows that social connection is one of the strongest predictors of a happy, healthy retirement, and that loneliness exacts a measurable toll on both health and longevity. Trading a deep-rooted social network for a new zip code is a bigger gamble than most people realize when they’re touring model homes.

And don’t forget about your space itself. Retirement is when you finally have time for the woodworking shop in the garage, the garden you’ve been building for thirty years, the sewing room, the workbench. Downsizing often means giving up the very square footage that makes retirement enjoyable, right at the moment you have the most time to use it.

Timing is Everything in Life

What to Do Instead: Age in Place and Put Your Equity to Work

So if downsizing is off the table, what do you do about the very real financial pressures that push people toward it in the first place? In my experience, the need for cash is one of the strongest driving factors behind the decision to downsize. The good news is that there are several ways to turn home equity into cash that don’t involve selling the house.

The one I find myself discussing most often is the reverse mortgage, specifically refinancing into a Home Equity Conversion Mortgage. Done right, this eliminates your monthly mortgage payment entirely, and if you have sufficient equity, you can simultaneously establish a line of credit you can draw on for emergencies or day-to-day living expenses. That credit line even grows over time. Reverse mortgages earned a rough reputation decades ago, but today’s federally insured versions carry strong consumer protections, and for the right homeowner they can be the difference between scraping by and living comfortably in the home you love. A traditional HELOC or a cash-out refinance can also make sense in certain situations, though today’s rates make those options less attractive than they once were.

On the physical side of aging in place, this is where my CAPS training comes in. Most homes can be adapted for the long haul at a fraction of what a move costs. An investment somewhere in the range of $15,000 to $30,000 typically covers the essentials: a walk-in shower, grab bars, improved lighting, wider doorways, and a workable single-floor living arrangement. Compare that to six figures in selling costs and taxes, plus the upheaval of a move, and the renovation route often wins in a landslide. Those modifications can buy you another decade or more in your own home.

When Downsizing Does Make Sense

I want to be fair here, because downsizing truly is the right call for some people. If your home’s equity is essentially your entire retirement plan and you need to unlock it to fund your lifestyle, selling may be unavoidable. If your children have settled far away and the house anchors you to a community that’s emptied out around you, a move closer to family can be worth every penny of the transaction costs. If the maintenance has become a burden you dread rather than a chore you manage, or if the home simply can’t be adapted to your mobility needs, those are legitimate reasons to go.

My point isn’t that nobody should ever downsize. My point is that downsizing should be a deliberate decision made with full knowledge of the costs, not a default move you make because people are telling you it’s best for you. Run the real numbers, including the taxes, the selling costs, the HOA fees, and the future appreciation you may be giving up. Then weigh the parts of the decision that don’t have numbers attached at all.

The Bottom Line

Your home is likely the best investment you’ve ever made, and the longer you hold it, the better that investment tends to perform. Before you sell it to chase savings that may never materialize, look hard at what staying would take: perhaps some thoughtful modifications, perhaps a smarter equity strategy, perhaps just permission to stay in the place where your life actually happens.

If you’re weighing this decision anywhere in Silicon Valley, I’d welcome the conversation. Sometimes the best advice a REALTOR® can give you is to stay right where you are.

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