Hello everyone, and welcome to the Retiring Canada podcast!
In today’s episode, we’re diving into a topic that’s both practical and emotional for many retirees: downsizing in retirement.
We’ll cover:
The reasons retirees choose to downsize
Key factors to consider, no matter your motivation
Real-world scenarios we’ve guided clients through
Why taking your time is essential, and
A few action items to help you get started.
When we talk about downsizing in retirement, we’re referring to making a change in your living situation—whether that’s moving to a smaller home, relocating to a more affordable area, or even shifting to a different province where you get more value for your dollar.
For some, this decision is driven by finances. Selling a home can unlock equity that can be reinvested to generate retirement income. For others, downsizing is about simplifying life: decluttering, reducing maintenance responsibilities, moving closer to family, or creating a more manageable living space.
Whatever your motivation, there are common considerations to keep in mind that could significantly impact your decision. Additionally, if your move frees up cash, it’s essential to have an investment strategy ready to make the most of those funds.
Key Considerations for Downsizing
1. Taxes
For most retirees, selling your home won’t trigger a tax bill thanks to Canada’s Primary Residence Exemption, which allows you to sell your principal home tax-free.
However, if you own multiple properties—such as a vacation home or cottage—you’ll need to carefully consider which property you designate as your primary residence. This can have a major impact on your tax situation.
Here’s an example:I recently worked with a couple who owned two properties—a modest home they bought in the 1980s for $100,000 (now worth $400,000) and a cottage purchased in the 1990s for $150,000 that’s now valued at over $1 million. Thanks to significant real estate appreciation, particularly in the cottage’s desirable location, it made more sense for them to claim the cottage as their primary residence to shield that larger gain from taxes.
However, determining the right strategy requires careful analysis of purchase dates, overlaps, and usage, such as whether a property was ever rented. In this case, after discussing the options, I advised my clients to consult their tax accountant to ensure everything was in order before making a final decision.
And I recommend you do the same.
2. Costs
Downsizing isn’t without expenses. You’ll need to budget for:
Real estate fees
Legal fees
Land transfer taxes
Other closing costs
Additionally, consider moving or storage expenses. If you still have a mortgage, check for any penalties associated with paying it off early. These costs can add up, so it’s crucial to understand how they’ll affect your bottom line.
3. Finding the Right Fit
When choosing your next home, ask yourself:
Will I host guests often?
Do I need space for hobbies or storage?
Should I keep a yard for pets?
Can I downsize comfortably by decluttering?
Think long-term as well. If this move might be your last, consider your future needs:
Is the home accessible as you age?
Is it close to essential services like grocery stores or healthcare?
Are stairs, narrow hallways, or steep driveways potential issues?
Planning for these factors now can help you avoid unnecessary stress later.
4. Renting Instead of Owning
For lifelong homeowners, renting might feel like an unlikely option, but it has its merits.
If you’re relocating to a new city or province, renting temporarily allows you to test the area before committing. Renting can also provide flexibility if you want to travel or explore other living arrangements. While stability is often a priority in retirement, it’s worth considering if renting could be a practical short-term solution.
5. Create a Comprehensive Plan
Here are some common scenarios we encounter with clients:
Some retirees prefer to purchase a new home before selling their current one, which might require bridging finances or navigating timing challenges.
Others find themselves with excess cash after downsizing. In these cases, determining the best accounts and investments can optimize income and minimize taxes.
Regardless of your situation, a well-thought-out plan will make the transition smoother.
Final Thoughts
Moving from a home filled with memories is rarely an easy decision. It often takes years to turn the idea into reality. But with time and proper planning, you can ensure this transition sets you up for success in the next phase of life.
Action Items
Start the conversation. Begin with a pros and cons list to weigh your options and clarify your goals.
Consider renting first. This can offer flexibility and peace of mind before committing to a purchase.
Review your tax situation. If you own multiple properties, consult a planner and tax professional to make the most of your Primary Residence Exemption.
Thank you for tuning in to today’s episode!
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All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.