Downsizing to a Smaller Home in NYC

We help people trade down in New York, and it’s rarely just a smaller apartment. It’s a tax event, a logistics project, and a decision about stairs. Here’s how to run it.

When to downsize your home

The stairs make the decision for many people before the spreadsheet does. A walk-up that was charming at 45 is a real constraint at 70. A house with a yard is a maintenance job you may not want to keep.

The financial trigger is usually a mismatch: too much space, too much cost, and equity that’s just sitting in the walls. If your home is worth far more than what you owe and more than you need, downsizing turns that equity into money you can use. Our rent vs buy in NYC post covers whether the smaller home should even be a purchase.

The capital gains exclusion on a home sale

The IRS treats your home as an asset only at the moment you sell it. When you sell a primary residence, you can exclude up to $250,000 of the gain from tax, or $500,000 for a married couple filing jointly. To qualify, you must have owned the home and lived in it for two of the last five years.

Gain above the exclusion is taxed as a capital gain. New York State and City also tax that gain as income for residents. The New York State transfer tax on the sale is paid by you, the seller. Keep records of what you paid and every capital improvement, because those lower the taxable gain.

What downsizing to a smaller home actually costs

The smaller place is cheaper to live in, but not always cheaper to move into. Add up the sell side and the buy side before you assume you come out ahead.

Selling costs 6% to 8% of the sale price, mostly the broker commission. If your building has a co-op flip tax, add 1% to 3% of the price. Buying the smaller place costs 2% to 5% in closing costs, including the mansion tax if it’s $1,000,000 or more.

Then there’s the move itself and the cost of getting rid of what doesn’t fit. A commission rebate on the purchase side puts some of that back.

A downsizing checklist for NYC

Do it in this order.

• Get a real valuation of your home. Estimate the net proceeds after commission, flip tax, and transfer tax.
• Decide on a co-op, condo, or rental for the next place, and get pre-approved if you’re buying.
• Measure the new rooms before you promise the sofa a home. Most downsizing regret is furniture that didn’t fit.
• Sort belongings into keep, family, donate, and sell, and start months early.
• Line up movers and, if needed, a short storage bridge between closings.

Run the two transactions together on the closing cost calculators so you see the net.

Downsizing in NYC without leaving

You don’t have to move to the suburbs to downsize. You can shrink the square footage and keep the bagel place. Many people trade a house for a smaller co-op or condo in the same neighborhood. Others move from a walk-up to an elevator building a few blocks away.

If aging in place matters, look for single-floor living, a no-step entry, an elevator, and a building with a super. The National Institute on Aging also flags lever door handles and grab bars as small changes that matter later.

What we tell clients who are downsizing to a smaller home

The goal is fewer houses, not less money. A good downsizing move lowers your monthly cost, frees equity you can invest or spend, and leaves you somewhere you can live comfortably for years.

Time the two deals carefully. Selling first gives you certainty on proceeds but may force a rental in between. Buying first risks carrying two homes.

Georges’ view of the market applies to the next place: “I don’t think any neighborhood is overpriced, quite frankly. The market is transparent.” A well-priced home sells, and you don’t need to hunt for a hidden gem.

Common questions

How much of my home-sale profit is tax-free? Up to $250,000 of gain if you file single, or $500,000 if you file married filing jointly. You must have owned and lived in the home for two of the last five years. Gain above that is a taxable capital gain.

Does a co-op charge a fee when I sell? Many do. It’s called a flip tax. It’s set in the proprietary lease or by-laws, and it’s often 1% to 3% of the sale price, paid by the seller.

Should I sell my current home before buying the smaller one? Selling first locks in your proceeds but may require a brief rental. Buying first avoids a double move but risks paying for two homes at once. Most downsizers sell first.

Is downsizing worth it financially in NYC? Usually, if the current home is worth much more than you need and your monthly costs are high. Subtract the 6% to 8% sell-side costs, any flip tax, and 2% to 5% buy-side costs to see the real gain.

Written by Nicole Fishman Benoliel

Co-founder of NestApple and a lawyer admitted to the New York bar, not currently practising.