A baby boomer couple whose home is worth millions doesn't need to sell. They can retire in the backyard.

• Sue and Ken Allen's Palo Alto home, bought for $63,000 in 1975, is likely worth $3-4 million.
• The threat of capital gains taxes and higher property taxes discourages them from selling.
• Instead, they're planning to downsize to a tiny home accessory dwelling unit in their backyard and rent out the main house.

Sue Allen and her husband, Ken, moved to Palo Alto in the 1970s, just as the South Bay was beginning to be known as Silicon Valley.

Allen, 75, and her husband, 77, bought their home in South Palo Alto for about $63,000 in 1975. These days, surrounded by Stanford University and the headquarters of a slew of the biggest tech companies in the world, the home is likely worth close to $4 million.

The home is large — in the mid-1980s the couple added a second story to the house to accommodate four additional bedrooms and two bathrooms as their family grew.

In the early 2000s, they rebuilt the single-story cottage in their backyard — also known as an accessory dwelling unit — to include a bedroom, kitchen, and bathroom. They've rented out the cottage ever since.

But the Allens have no plans to sell their home, despite the fact that it's larger than what they need. That's because they plan to eventually downsize to their backyard cottage and rent out the main house.

The Allens aren't alone in relying on an ADU for housing in their older age. Backyard tiny homes — or other accessory units in basements or attics — are an increasingly common way for homeowners to add living space, boost the value of their property and earn extra income through rent, and even create a place to age in. California is one of 14 states that have broadly legalized ADUs and more than 60,000 have been permitted in the state since 2016.

When selling will cost you

In addition to having a backyard home to downsize to, it doesn't make much financial sense for the Allens to sell their property and buy a smaller home to age in.

If they sold the property, they'd be on the hook for hefty capital gains taxes, which apply to couples who make more than $500,000 in profit and individuals who make more than $250,000. They'd also likely have to pay significantly higher property taxes if they purchased a new home, not to mention a relatively high interest rate on any new mortgage.

Like other California homeowners who purchased their properties decades ago, the Allens benefit from exceedingly low property taxes as a result of Proposition 13, which mandates that property taxes are just one percent of the home's purchase price and can't rise by more than two percent each year until the next sale.

The California law has contributed to the so-called homeownership "lock-in effect," which intensifies over time as home values rise and the property taxes someone would have to pay on a newly purchased home rise.

"We're living in this $4 million house, and we don't downsize because it's kind of not worth it," Allen said. "We'd have to pay so much in taxes."

Allen's story reflects a broader trend of boomer homeowners who've grown significant wealth through their home equity. And she's quick to acknowledge that she's both benefited from and perpetuated "generational wealth" through homeownership. She could afford her own $12,500 downpayment only with help from her mother. In turn, she's helped her five adult children with their down payments. But the Allens' kids have all left California to live in other states — Texas, Idaho, Utah, and Nevada — where housing is more affordable.

Zillow estimates the Allens' property is worth about $3.1 million, while Redfin puts it at nearly $3.5 million. Allen thinks it could be sold for closer to $4 million, based on what similar homes in her neighborhood have fetched in recent months. A much smaller home down the street from the Allens' house sold for $3.6 million in August.

"People spend three to $4 million for a house, knock it flat, and build a big new house on the lot," she said.

Allen still works part-time for the East Palo Alto school district doing tech support, but her husband, a former patent attorney, is fully retired.

If Allen's husband, who has Parkinson's disease, develops dementia and she can no longer take care of him, they plan to move into assisted living in Utah, where two of their kids live and where long-term care is cheaper than in California. But they hope to stay in their neighborhood, where they have strong ties with neighbors and friends, for as long as they can.

"Our support system, our friends — we have a really strong church community here," Allen said. "We really want to stay here."