When Inheriting Property, Consider Your Best Option

19 Dec

Inheriting real estate from your parents or other family member can often end up being a unexpected windfall, or somewhat of a burden. In many cases it can be a bit of both. 

A well maintained home in a desirable area can be quite the blessing, while an old dilapidated house hundreds (or even thousands) of miles from where you currently live can end up being more work than it is worth. Regardless of the condition of the house or just how excited you are about the inheritance; it now falls to you to deal with it.

There are a few choices that you have when it comes to inherited property and we thought it might be a good idea to take a closer look at your options when it comes to dealing with a real estate inheritance.  

What Are My Options?

In most cases there are three basic options for property that you inherit. Let’s have a quick look at those options and some factors that can impact your choice. 

  • Move in: If you love the house or would love to use it as a vacation home, you may want to move in and make it your own. Considerations that can come into play with this scenario include whether or not you have siblings that also have a share in the house and financial factors such as can you afford the taxes and upkeep. 

If siblings are an issue, you may want to consider have the home appraised and buying them out of their share. Before you commit to any plan with an inherited house you should give your own finances a review to make sure you can truly afford the inherited house. 

  • Sell it: If you have no interest in moving in or becoming a landlord, the best option may just be to put it on the market and sell it. If you are selling you will need to make any necessary repairs to make sure it will bring the best price, determine a price (if you have siblings everyone’s opinion will have to be taken into account), as well as make sure the sale will cover any remaining balance if there is a mortgage or lien on the property. 
  • Rent it: If becoming a landlord is something you are interested in, renting out your inherited property could be an option. This option comes with a variety of issues that must be addressed. Getting a rental agreement in place, finding a tenant and of course dealing with any issues that crop up from maintenance to repairs when things break. Being a landlord can be time consuming so make sure you are up to the task or the property makes enough so you can afford a property manager. 

In addition to deciding what you want to do with the property there are other factors you will have to take into account. Taxes, any remaining mortgage as well as assessing the condition of the home are all things that will fall to you as the new owner. Here are a few items you may have to deal with:

Taxes: The taxman will not coming knocking unless you decide to sell the property. If you keep the house or rent it there shouldn’t be a tax bill except the yearly property taxes. However, if you decide to sell the house, you could be subject to capital gains tax.  

Inherited property comes with a step-up basis. This means that if the home you inherited was originally purchased for $200,000 years ago but is now worth $400,000 you get a step up from the original cost to what it is worth now. Once you take possession of the home you should have an appraisal done to determine the current value. 

If you immediately sell the house, there should not be any capital gains taxes but if you hang on to it for a few years and then sell it, you may be liable for capital gains taxes. Using our previous example, while there would be no capital gains on the $400,000 the house was appraised at, if you held on to the house for a few years and it was worth $450,000 when you sold it, the additional $50,000 would be subject to capital gains. 

Mortgage: If the house has a mortgage left on it you will need to deal with this before taking possession of the home. If you cannot afford to pay off the mortgage outright, you may need to take a new mortgage out on the home in your name to pay off the old mortgage. In other cases, you may be able to assume the existing monthly mortgage payment and transfer it into your name. 

Repairs: You should always hire a home inspector to check over the house and make sure it is not in need of extensive repairs. A home in poor condition may require expensive repairs, making it difficult to sell. Check with a realtor if you are interested in selling to see if it makes financial sense to make repairs. 

Inherited property can be a financial windfall, just make sure you properly assess the property before making any decisions on what you will do with it. 

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