Why Retirees Can't Downsize? It's the Housing Shortage to Blame, Not Taxes

In the face of a growing housing crisis, a crucial demographic is being overlooked: America's retirees. Contrary to recent coverage by CNN Business, the challenge facing many seniors looking to downsize isn't primarily tax implications but the stark shortage of smaller, suitable homes.

There is a nationwide housing deficit that's particularly impactful on seniors. A CNN analysis notes that the U.S. is short of approximately 6.5 million homes, a gap that significantly affects the availability of smaller homes suitable for retirees. This shortfall is creating an environment where seniors, even those eager to downsize, find themselves with limited options. In Texas, for example, over 765,000 older residents struggle with housing costs, as reported by the Texas Tribune. These numbers are not just statistics; they represent real people grappling with the challenge of finding affordable, appropriate housing in their later years.

While much has been made of the tax burden on retirees looking to sell their homes, this is perhaps a less critical issue than it seems. Capital gains tax often cited as a deterrent only applies to profits, as in the difference between the purchased and sold price, that exceeding $500,000 for married couples and $250,000 for single individuals. This threshold, not applying to the total sales price, means that many retirees will have low or no tax burden unless they are in some of the regions that saw the highest housing appreciation and even those will still have plenty leftover after a home sale. Moreover, options like subdividing a property, such as with a property lot split or condoized Accessory Dwelling Units, are viable solutions in jurisdictions where it is permitted, and thus should be legalized as much as possible. There's also a moral question at play: Why are we mad about taxes on what is essentially income from what is a historic home value appreciation? Contributing to your community and country through taxes on property and income is incredibly patriotic, and allows us as a nation to have more resources available to help those who weren’t as lucky to benefit from this same kind of financial windfall, benefitting all of us together in the end.

For many seniors, their oversized homes are not just unnecessarily large; they're often incompatible with mobility needs and can become difficult for older people to continue to maintain. As retirees age, the need for accessible, manageable living spaces becomes increasingly crucial. The lack of movement in the housing market among retirees is largely due to a dearth of inventory, with historic lows in homes for sale exacerbating the issue. This stagnation affects not only the seniors but also the broader housing market, impacting young families and first-time buyers.

Addressing this crisis requires a concerted effort across multiple fronts:

1. Policy Reform: We must advocate for policies that help to increase the supply of small, affordable homes and ease the regulations around property subdivision and ADU construction, while also pushing for better infrastructure for walking, biking, and transit. Additionally, special policies that encourage homeowners to sell their home to a developer development but allow them to own one unit in the new building will help to more quickly create new apartment buildings without displacement, this is how Polikatoikia apartment buildings solved a housing crisis in Greece.

2. Community Initiatives: Promoting and allowing Residential Retail in all neighborhoods to quickly make communities more walkable. Advocating for denser zoning, and pushing for smaller minimum square footage standards in housing are also critical steps.

3. Individual Actions: For those able, pursuing options like building an ADUs or a lot split (where it is allowed) can provide a path forward. Even something as simple as renting out a spare room, helps to add inventory to the overall housing market. Also actions like showing up for local meetings, speaking out, and getting involved with local or national organizations to help legalize more homes.

The primary barrier for retirees looking to downsize is not the tax implications but the acute shortage of appropriate, smaller homes in walkable communities. This housing shortage demands a response that is as compassionate as it is pragmatic. As a society, we must focus on solutions that address this shortage, facilitating better downsizing options for our seniors. Only then can we ensure that the later years of our community members are marked by comfort and dignity, rather than uncertainty and struggle.

Michael Moore is the Founder and Editor-in-Chief of Resident Urbanist. He has previously written for Streetsblog and Millennial American Dream, he has also been covered on Planetizen, the How We Work podcast, and StrongHaven. You can follow him on Threads, Twitter, LinkedIn, and Instagram.