The Ultimate Guide to Downsizing in Retirement: How Proposition 19 Can Help You Save Thousands

The Ultimate Guide to Downsizing in Retirement: How Proposition 19 Can Help You Save Thousands

Retirement is an exciting new phase of life—a time to relax, travel, and focus on the things that matter most. For many longtime homeowners in San Francisco and throughout California, downsizing can be a smart and rewarding way to begin this chapter. While saying goodbye to a longtime family home may come with emotional weight, the financial, practical, and lifestyle benefits of making this move can be transformative.

If you're 55 or older and considering downsizing, there’s a powerful tax advantage available to you under California's Proposition 19. In this blog, we’ll break down how Prop 19 works, the financial benefits of downsizing, and how to maximize your home equity to support your retirement goals.

Why Downsizing Makes Sense in Retirement

1. Unlocking Home Equity
Many San Francisco homeowners have lived in their homes for 20 to 30 years, which means property values have increased dramatically since the original purchase. Downsizing can free up hundreds of thousands—if not millions—in home equity that can be used for travel, investing, or buying a second home.

2. Reduced Costs and Maintenance
A smaller home often means significantly lower utility bills, property taxes, and maintenance costs. Instead of spending weekends on yard work or repairs, retirees can focus on enjoying their time and hobbies.

3. Simplified Living
Moving to a smaller, more manageable space reduces clutter and encourages intentional living. Many retirees find a sense of peace in this simplicity.

4. Accessibility and Aging in Place
Downsized homes—especially condos or single-level residences—are often designed with accessibility in mind. San Francisco has many full-service condo buildings that offer amenities like doormen, maintenance staff, and elevators, making aging in place easier and more enjoyable.

5. Lifestyle Upgrade
Many retirees choose to move to 55+ communities, where they can enjoy a built-in social network and a host of activities. Whether it’s yoga, hiking, or happy hour mixers, these communities offer vibrant social lives.

Tax Advantages: Understanding Proposition 19

Passed in 2020 and implemented in 2021, Proposition 19 significantly expanded the ability for homeowners 55 and older to transfer their property tax base when moving to a new home. This can lead to major savings.

Key Features of Proposition 19:

• Eligibility: Homeowners must be 55 years or older at the time of selling their primary residence.

• Location Flexibility: You can transfer your tax base to a new home anywhere in California. Previously, it was limited to just a few counties.

• Value Rules:

  • If the replacement home is equal to or less in value than your original home, you can transfer the tax base without adjustment.

  • If it’s more in value, the difference is added to your original assessed value to determine your new tax base.

• Timeframe: The replacement home must be purchased or newly constructed within two years of selling the original home.

• Frequency: This tax benefit can be used up to three times in a lifetime.

Real-Life Example:

Let’s say you sell your San Francisco home for $1 million, with a low assessed value of $500,000. If you purchase a new home for $1.2 million, your new tax-assessed value would be:

$500,000 (original base) + $200,000 (price difference) = $700,000

Instead of paying property taxes on $1.2 million, you'd pay taxes on $700,000. Over the years, that adds up to tens of thousands in savings.

Using Equity to Your Advantage: The 1031 Exchange Strategy

For homeowners with significant equity who are looking to downsize and invest, a strategic move is to use a 1031 exchange on a portion of the proceeds. Here’s how it works:

• Primary Residence Exclusion: When selling your primary residence, you can exclude up to $250,000 (single) or $500,000 (married) in capital gains from taxes.

• 1031 Exchange for the Rest: You can use the rest of your equity to purchase a rental or vacation property through a 1031 exchange, deferring taxes on that gain.

This approach can allow you to:

• Downsize to a condo or smaller home

• Purchase an income-generating property

• Use that property occasionally for vacations

• Defer capital gains taxes

It’s a win-win situation if you want both a simpler lifestyle and a real estate investment.

What Downsizing Might Look Like in San Francisco

Popular Downsizing Options:

• Condos or co-ops in neighborhoods like Pacific Heights, Nob Hill, or South Beach

• Smaller single-family homes in the Sunset or West Portal

• 55+ communities in nearby counties (Marin, Sonoma, Santa Clara)

Amenities to Look For:

• Elevator access

• Security and doorman service

• Onsite maintenance

• Community rooms or clubs

• Walkable locations with access to cafes, shops, and parks

Bonus Tip: Look for buildings with strong HOA reserves and good management—they tend to maintain value better over time.

Overcoming the Emotional Hurdle of Letting Go

Moving after decades in the same home can be emotional. Your house may be filled with memories, belongings, and family history. But many retirees say that once they make the move, they feel lighter and freer.

Tips to ease the transition:

• Start early: Begin decluttering and donating items you no longer need.

• Keep the meaningful stuff: Create a memory box or scrapbook to preserve sentimental items.

• Think forward: Focus on the possibilities a new space can offer.

How to Get Started with Downsizing

1. Estimate Your Home Value: This will help you understand how much equity you have to work with.

2. Explore Neighborhoods: Tour condo buildings or retirement communities.

3. Talk to a Financial Advisor: Especially if you’re considering a 1031 exchange or managing significant equity.

4. Hire a Realtor Who Understands Retirement Needs: Downsizing is not just about selling your home—it’s about setting up the next chapter of your life.

Final Thoughts: Retirement Is a New Beginning

If you're 55 or older and thinking about downsizing in San Francisco or the surrounding areas, the combination of home equity, lower expenses, and Proposition 19 tax savings could be a game-changer for your retirement. Whether you're seeking a low-maintenance condo, a move-in-ready home with accessibility features, or an investment property to fund your adventures, there are more options than ever before.

Let me help you take the next step.

As a local real estate agent who has helped many San Francisco homeowners transition into retirement, I can help you understand your home’s current value, explore your downsizing options, and navigate the tax and real estate strategies available to you.

Reach out to me today to get a free estimate of what your home is worth and how you can make the most of your next move.

— Lisa Vukovic, SF Real Estate Expert