Downsizing, Renting or Aging in Place: The Numbers Behind the House

Up to $250,000, or $500,000 on a joint return. To qualify, you must have owned the home and used it as your main home for at least 24 months of the five years ending on the sale date, and you must not have excluded the gain on another home sold in the two years before (IRS Topic 701). On a joint return, either spouse can meet the ownership test, but both must meet the use test for the full $500,000.

Gain is the amount realized, the sale price less selling costs, minus your adjusted basis. Basis is what you paid plus the cost of improvements that add value or extend the home's life, such as additions, a new roof, a new heating system or landscaping; repairs and repainting do not count (IRS Publication 523). For people who bought decades ago, receipts for a 1998 kitchen or a 2010 roof are worth real money now.

Three rules matter especially after 60. A surviving spouse who has not remarried can still claim up to $500,000 if the sale happens within two years of the spouse's death (IRS Publication 523). If you move into a licensed care facility because you can no longer care for yourself, time there counts toward the two-year use test as long as you lived in the home for at least 12 months of the previous five years (IRS Publication 523). And inherited property generally takes a basis equal to its fair market value at the date of death (IRS Publication 551): at the first death, the deceased spouse's share of the house usually gets a new basis, and in community property states the whole house may.

Gain above the exclusion is a long-term capital gain. For 2026, joint filers pay 0% on gains that fall within the first $98,900 of taxable income, 15% up to $613,700 and 20% above (IRS Rev. Proc. 2025-32). The 3.8% net investment income tax also applies to the taxable portion when modified AGI exceeds $250,000 for joint filers, a threshold that is not indexed for inflation; the excluded portion is exempt (IRS).

More than most people budget, because costs arrive on both ends. On the sale: agent commission, which is negotiable; the seller's share of transfer taxes and title charges, which vary by state; repairs and staging; and carrying costs for the months between moving out and closing. On the purchase: closing costs, moving, new furniture sized to smaller rooms, and the first year of the new home's surprises. A combined 8% to 10% of the old home's value is a reasonable planning figure for a full sell-and-buy move, though your figure depends heavily on commission and state taxes.

The savings are also larger than people expect, and they recur. Property tax, insurance, utilities and maintenance usually scale with the size and value of the house. Many planners use 1% to 2% of a home's value a year for maintenance on an older house; you know your own figure from your records. A condominium or townhouse adds association dues but removes most exterior maintenance, which matters more at 80 than at 65.

If you still carry a mortgage, the sale is a natural point to retire it. Our Mortgage Payoff Calculator shows the interest remaining on your current loan, which is the right comparison when deciding whether to buy the next home outright or keep some leverage. For a new city, the Cost of Living Calculator translates your budget to the new location.

Frank is 71 and Carol is 69. They bought their suburban house in 1994 for $240,000 and have $85,000 of documented improvements. It is worth $1,350,000. They have $1.6 million invested, a pension, Social Security, and about $100,000 of other income a year, about $70,000 of it taxable after deductions. The stairs are becoming a problem and they want a single-level condo near their daughter, priced at $700,000. They are hypothetical, and every figure below is federal only.

The Medicare echo. The sale lifts their MAGI to about $545,000. Two years later, that puts each of them in the $410,001–$749,999 joint IRMAA tier: $649.20 a month for Part B instead of $202.90, plus $83.30 on Part D (CMS, 2026 brackets). That is $529.60 a month each, or about $12,700 for the couple for one year. Because a home sale is not a life-changing event, they budget for it rather than planning to appeal it. See our Medicare and IRMAA guide.

Where the money goes. After $73,600 of federal tax and $25,000 of moving and setup costs, they buy the condo for cash and add about $470,000 to their portfolio. Their carrying costs fall from about $34,000 a year (property tax, insurance, maintenance) to about $21,000 including association dues. At a 4% withdrawal rate the extra $470,000 supports about $18,800 a year, so the move adds roughly $32,000 a year to what they can spend, before counting the tax.

The case for waiting. If they stayed until the first death, half the house would get a new basis, cutting the taxable gain; if the survivor then sold within two years, the $500,000 exclusion would still apply. Held until both deaths, the $945,000 gain would vanish for their daughter. That tax saving, roughly $74,000 plus the IRMAA year, is real. But it would mean a stair lift, a first-floor bathroom and years in a house that no longer suits them, and it is only a saving if they would otherwise sell anyway. They decide to move now, while both are healthy enough to make the new place home.

Rent when flexibility is worth more than the housing hedge. Selling and renting converts home equity into an investment portfolio and a monthly bill. For Frank and Carol, the $1.17 million left after tax and moving costs, withdrawn at 4%, would produce about $47,000 a year, close to the rent on a comparable two-bedroom near their daughter. They would own nothing that needs a roof, and could move to assisted living at the end of a lease instead of after a house sale.

The costs of renting are real too. Rent rises with local markets, while a paid-off home's costs mostly rise with property taxes and insurance. You give up control over the landlord, the building and the lease renewal. And a portfolio that pays rent is exposed to sequence risk in a way a paid-off home is not. Our rent vs. buy guide covers the general math. In retirement, renting tends to win in three cases: you face a large taxable gain regardless, you expect another move within five years, or maintaining a property has become a burden you would pay to be rid of.

A house that works at 85, not just at 70, and a plan for help. The main physical risk is falling: more than 14 million older adults, one in four, report a fall every year, and falls are the leading cause of both fatal and nonfatal injuries among older adults (CDC). Most modifications are about preventing that.

• A bedroom and full bathroom on the entry level, or room to add them.
• A walk-in shower with grab bars and a bench, instead of a tub.
• Zero-step entry, wider doorways and lever handles.
• Brighter lighting, including on stairs and paths at night.
• A stair lift or, in larger homes, a residential elevator.

Get quotes before deciding. Some houses adapt for a modest sum; others would need tens of thousands of dollars and still sit at the end of a long driveway 20 minutes from a hospital. Aging in place also depends on help: a spouse, nearby family, or paid caregivers, which at 2025 national medians cost $35 an hour. Our long-term care guide covers how to plan for that.

Sometimes, mostly as a standby line of credit for people who intend to stay. The FHA-insured version, the Home Equity Conversion Mortgage, lets homeowners 62 and older borrow against the home with no monthly payments as long as it remains their principal residence, provided they keep paying property taxes and homeowner's insurance (HUD). Borrowers must first meet with a HUD-approved counselor. For 2026, the maximum claim amount is $1,249,125 nationwide (HUD Mortgagee Letter 2025-22). The amount you can actually draw is lower and depends on the youngest borrower's age, interest rates, and the lesser of the appraised value, the sale price or that limit.

The loan is repaid when the last borrower dies, sells or moves out. Heirs who want to keep the home repay the lesser of the loan balance or 95% of the appraised value, and if the balance exceeds the home's value, the FHA insurance covers the difference; heirs are not personally liable (CFPB). A spouse who is not a co-borrower may lose the right to stay unless they qualify as an eligible non-borrowing spouse, so both spouses should usually be on the loan (CFPB).

Costs are the objection. Upfront mortgage insurance, origination and closing costs are high relative to a conventional loan, and the balance compounds. The use that most often makes sense for affluent retirees is an unused line of credit opened in the early 60s: it can be drawn in a bad market year so the portfolio is not sold at a loss, or held for care costs later. For Frank and Carol, whose house is worth more than the limit, only the first $1,249,125 of value would count. There is also a HECM for Purchase, which lets you buy the next home with part cash and part reverse mortgage.

Taxes, health coverage and your support network. State income tax treatment of Social Security, pensions and IRA withdrawals differs widely, as do property and estate taxes, and a move that saves income tax can cost more in property tax and insurance. Establishing residency in a new state takes more than a new address: change your driver's license, voter registration and wills, and expect a former high-tax state to scrutinize a part-year move.

Medicare coverage may need to change too. Medicare Advantage plans are local, so moving out of a plan's service area ends that plan and, in some cases, gives you a guaranteed right to buy a Medigap policy (Medicare.gov). Original Medicare with Medigap travels with you, though Medigap premiums are set by state and may change. Before moving, check that the doctors and hospitals you would use accept your coverage.

The most important factor is rarely financial. Most people who move in retirement move toward children and grandchildren, and the move is easiest while both spouses are healthy enough to build new friendships and find new doctors. A move at 70 is a new chapter. A move at 85 is usually a crisis.

Answer four questions in order. First, does the house still work physically for the next 15 years, and what would it cost to make it work? Second, what would you net from a sale after selling costs, federal and state tax and the IRMAA year? Third, what would the next home or rent cost, all in? Fourth, how much do you value leaving the house, or its untaxed gain, to your heirs?