Inheriting a house often comes with the emotions of dealing with the death of a loved one. However, it also means making some tough financial decisions: Do you keep it and move into it? Do you rent it out? Do you sell mom or dad’s house? What happens if it’s in desperate need of repairs? And even if the mortgage is paid off, there’s really no such thing as a “free” house.
“It can be a pain in the butt and you want to make sure it’s dealt with very efficiently, because if you’re not efficient with your decisions you have costs accruing on the home – property taxes, insurance, a mortgage, homeowners’ association fees. All of these things add up,” said Paul Tharp, a Minneapolis Realtor at Coldwell Banker Burnet.
“A free home is not necessarily as free as you’d think,” Tharp said.
What To Do If You Inherit a House
1. Hire a good tax attorney specializing in estate tax law to help with the complex paperwork. They can help you clear the property title and get the house transferred to your name.
2. Get an inspection, especially if the house hasn’t been updated in years.
3.Come to a consensus with everybody who has a stake in the house. The property may be left to multiple siblings (or other relatives) to split.
“It helps if everybody in the family is on the same page,” Tharp said. “If everybody has different interests, it’s going to get messy.”
This will all help you prepare for the next big decision: Move in, rent or sell it?
“You do have situations in which one of the children decides to live in the house,” said Mark Luscombe, principal analyst at Wolters Kluwer Tax Accounting. “As a straight, normal transaction, you treat all of the siblings equal. The siblings that aren’t using the house would generally expect to be paid by the sibling taking over the house.”
If the house is not paid off — or you buy out your siblings’ shares — you will likely need to take out a mortgage (unless you have cash to pay it off).
- You keep the house in the family.
- If you’re a renter, this may be a great opportunity to become a homeowner.
- If the house becomes your principal residence, you can qualify for the capital gains exclusion. That means you’re exempt from capital-gains tax the first $250,000 if single or $500,000 if married. However, you must live in the house for at least two of the past five years before you sell it.
- The house may need major repairs. “Generally, when you have an estate the person is older and the property typically has deferred maintenance,” Tharp said.
- You may pay higher property taxes. When you inherit a house, the valuation is “stepped up” to current market value, and you probably won’t receive senior tax breaks.
- Consider the baggage: “There are cases when the moving-in scenario does work, but obviously, you have to factor in, is the property suitable for that adult child? Are they married?” said Simon Brady, a certified financial planner and principal of Anglia Advisors in NYC. “And then there’s the more touchy feely stuff: Do you really want to bring up your kids in the house that you were brought up in?”
- You can supplement your income.
- You can wait for the real estate market to improve before selling without the home sitting vacant.
- Write off repairs and expenses.
- You become a landlord and deal with tenants, possible evictions and maintenance issues. “Getting involved in renting a property can be somewhat burdensome if you’re not in the area or not used to hiring people to maintain things,” Luscombe said.
- It can be expensive and you may have to pay a higher property tax rate. “You’ve got to insure that place,” Brady said. “You’ve got to pay the property taxes on that place. Depending on the type of property, you may have co-op or condo fees. You also subject yourself to the real estate market risks. The idea that real estate just goes straight up, I think we all learned in 2008 that’s not true.”
- There will be additional wear and tear on the property.
- It simply might not be practical to keep it, and you won’t have to deal with mortgage payments or property taxes.
- Although inherited properties don’t qualify for the home sale tax exclusion– unless you plan to live in it at least two years -– you can take advantage of the stepped-up tax basis. This means you only pay capital gains tax on the fair market value of the home at the time of death.
- While it’s on the market, you’re still responsible for all utility bills, insurance, taxes, lawn care and household maintenance tasks. And if there’s a mortgage—you must keep paying it.
- If several siblings are involved, conflicts may occur such as disagreements over pricing.
- A piece of family history is gone.
Tips for Selling
- Hire a real estate agent to assess the market and offer an idea of what the house is worth before making upgrades.
- Get a property inspection.
- Clear out personal belongings (hold an estate sale or garage sale).
- If the home has become rundown, it may make sense to market it to an investor who will buy it “as-is.”