Retirement Downsizing in Michigan: Costs & Tax Traps to Know
“We’ll just downsize” is one of the most common lines we hear from Michigan retirees planning their next chapter. Sell the big family home, buy something smaller, pocket the difference, and lower the monthly bills. Sometimes that’s exactly how it plays out.
But downsizing in retirement in Michigan comes with a few state-specific wrinkles that catch people off guard — and they can meaningfully change whether downsizing actually saves you money. Here’s what to check before you list your house.
1. Why “Smaller House, Smaller Bills” Isn’t Always True
The assumption behind downsizing is simple: a smaller, less expensive home means lower property taxes, lower insurance, and lower maintenance. That’s often true on the maintenance and insurance side. Property taxes — and, as one recent client found out, mortgage rates — are where Michigan retirees are most often surprised.
2. The Property Tax Uncapping Trap
Michigan’s Proposal A caps how much your home’s taxable value can rise each year while you own it — limited to the lesser of inflation or 5% (2.7% for the 2026 tax year). If you’ve owned your home for 10 or 15 years, your taxable value is likely far below what the home would actually sell for today.
Here’s the catch: when you sell, that cap disappears. The new taxable value “uncaps” and resets to the current State Equalized Value — roughly half of market value — the year after the sale. That means a smaller, less expensive replacement home can still come with a higher property tax bill than the larger home you’re leaving, simply because the new home’s taxable value hasn’t had years of capped growth behind it.
This is one of the two biggest reasons the math on downsizing doesn’t always work the way people expect. Here’s the other.
3. The Mortgage Rate Reset Nobody Talks About
Last year, my clients Lenny and Carol came in for a review meeting to talk about selling the home they raised their kids in, to buy something smaller that fit them better. They asked me to run the numbers on how much they’d actually save each month — and how much extra flexible spending that would create in retirement.
We priced out the smaller homes in the area that fit what they wanted. What we found surprised all of us: downsizing was actually going to cost them more, not less. A few factors stacked together to make that clear:
- The smaller homes they were looking at weren’t meaningfully cheaper than what they’d get selling their current house — so they’d still need a new mortgage.
- They’d refinanced in 2021, when rates hit historic lows, and locked in under 3%. Mortgage rates at the time of their house hunt were around 6.5%.
- Their current home’s property taxes were benefiting from years of Proposal A’s capped growth — and the new home would hit them with the uncapping jump the year after purchase.
Add it all up — principal, interest, property taxes, and insurance — and downsizing would have increased Lenny and Carol’s total monthly housing payment by nearly 40%.
For Lenny and Carol, the plan isn’t “don’t downsize” — it’s “not yet.” We’ll keep revisiting the numbers as the picture changes: if mortgage rates come down, or as they pay down more of their current mortgage, there may be a point where downsizing finally works in their favor, or at least stops working against them.
— Andrew Charbonneau, CFP®
4. Capital Gains on the Sale of Your Home
The good news: most Michigan homeowners sell their primary residence without owing any federal capital gains tax at all. Under Section 121 of the tax code, single filers can exclude up to $250,000 of gain, and married couples filing jointly can exclude up to $500,000 — provided you’ve owned and lived in the home as your primary residence for at least 2 of the last 5 years.
For most long-time Michigan homeowners, this exclusion comfortably covers the gain. It’s worth confirming, though, especially if home values in your area have risen sharply since you purchased, or if only one spouse meets the residency requirement.
5. The Principal Residence Exemption Timing Issue
Your Principal Residence Exemption (PRE) exempts your primary home from 18 mills of local school operating tax — often a meaningful savings. But the PRE is tied to one property at a time, and timing matters if you buy your next home before selling your current one.
Michigan does allow a Conditional Rescission, which lets you keep the PRE on your prior home for up to three years while it’s actively listed for sale — but it has to be filed correctly and on time. Retirees who buy first and sell later without filing this paperwork can end up paying full tax on two properties simultaneously.
6. What This Means for Your Retirement Income Plan
Downsizing isn’t just a housing decision — it’s a retirement income decision. As Lenny and Carol’s situation shows, the proceeds from selling your home, your existing mortgage rate, and property tax resets can move in ways that offset each other — or don’t. On top of that, a large enough gain can shift your Medicare premium tier (IRMAA) and change how much of your monthly budget goes to fixed housing costs versus flexible spending.
This is exactly the kind of decision worth modeling against your full retirement plan before you list the house — not after.
Thinking About Downsizing in Retirement?
Fiduciary • Independent • Transparent Compensation • Based in Auburn Hills
Frequently Asked Questions
It often does, but not automatically. Maintenance and insurance costs typically drop with a smaller home, but property taxes can go up due to Michigan’s taxable value uncapping at sale, and a new mortgage at today’s rates can outweigh the savings if you’ve locked in a low rate on your current home. It’s worth running the actual numbers before assuming downsizing will lower your monthly costs.
Most homeowners won’t. The federal exclusion allows single filers to exclude up to $250,000 of gain and married couples to exclude up to $500,000, as long as you’ve owned and lived in the home for at least 2 of the last 5 years. Gains above that threshold are taxed as long-term capital gains.
Michigan’s Conditional Rescission lets you keep the Principal Residence Exemption on your previous home for up to three years while it’s actively listed for sale, as long as the paperwork is filed correctly and on time. Without it, you risk paying full, non-exempt tax on both properties at once.
Yes. The proceeds, tax consequences, mortgage rate change, and shift in monthly costs from downsizing all affect how much you need to withdraw from savings and investments in retirement. It’s best modeled alongside your full income plan rather than decided in isolation.
About the Author
Andrew Charbonneau, CFP®
Founder & Financial Advisor, Redwood Wealth Management
Auburn Hills, MI | redwood-wealth.com | (248) 266-1386
Andrew is a CERTIFIED FINANCIAL PLANNER™ professional and fiduciary advisor serving Michigan families across Oakland County. He specializes in retirement income planning, tax strategy, and comprehensive financial planning for professionals and families in Auburn Hills, Rochester Hills, Birmingham, Bloomfield Hills, and Royal Oak.
