Is Inheriting Real Estate a Blessing or Curse? Areas of Consideration:
We usually think that inheriting a home, a lake house, a plot of land or any real estate is a wonderful blessing, and it can be. However, without the proper estate planning, inheriting real estate from your parents also has the potential to be a burden as well. So whether you have an aging parent and are discussing how they're planning their will or you, yourself, are taking great concern to reduce as many burdens as possible upon your passing, consider the choices when we inherit real estate from our parents.
3 Basic Options When Inheriting Real Estate: Move In, Sell, Rent
There are three main options when you inherit real estate: move in, sell, or rent. Which one you choose will depend on your current living situation, whether or not you have siblings, your finances, whether the house has a mortgage or liens, and the physical condition of the house.
The following five topics are some things to consider when choosing to move in to your inherited property, sell your inherited property or rent your inherited property:
Taxes: Will You Have to Pay Capital Gains Tax on Property You Inherit?
In most situations, you do not have to pay taxes on property you inherit, but if you sell the property, you will be subject to capital gains tax. The good news is that inherited property receives a step-up in basis. This means that if you inherit a house that was purchased years ago for $150,000 and it is now worth $350,000, you will receive a step up from the original cost basis from $150,000 to $350,000. You should get a real estate appraisal done as soon as possible to find out how much the house is currently worth. If you sell the property right away, you should not owe any capital gains taxes. If you hold on to the property and sell it for $400,000 in a few years, you will owe capital gains on $50,000 (the difference between the sale value and the stepped-up basis). On the other hand, if you use the property as your primary residence for at least two years and then sell the property, you may be able to exclude up to $250,000 ($500,000 for a couple) of capital gains from your taxes.
Will You Have to Pay the Mortgage on Property You Inherit?
Does the house have a mortgage on it – either a regular mortgage or a reverse mortgage? Sometimes it is specified in the estate plan that the estate will pay off the mortgage. In cases where it doesn’t, with a regular mortgage you will likely have to assume the monthly payments. There are some mortgages, however, that require the heirs to pay off the mortgage immediately. With a reverse mortgage, you usually have a limited time to pay off the mortgage in full.
Every House Requires Repairs and Upkeep: What Repairs Will be Needed and When?
It is a good idea to hire a home inspector to assess the condition of the house. If the property needs significant repairs immediately, it may affect what you do with it - either selling, living in it or renting it out. Renovations and repairs can be costly and time-consuming. You may want to consult with a realtor before taking on any big projects. It may not make sense to spend a lot of money on house repairs if you intend on selling, not all money invested in repairs will increase the property value dollar for dollar where as some can increase the market value more than dollar for dollar and be considered a decent investment.
Property Maintenance: Transferring Utilities, Paying Property Taxes, Insurance...
Once you inherit the property, you will be responsible for maintaining it. The first thing you want to do if you inherit property is make sure the utilities and homeowners’ insurance are transferred to the new owners and continue to be paid on time. You will also need to pay all the property taxes and any other fees associated with the property.
Considering Other Owners / Siblings
If you inherited the property with siblings, you will all need to agree on what to do with the property. If one sibling wants the property, he or she can buy it from the other siblings. Otherwise, you can sell or rent the property and split the profits. If there is a dispute among siblings, you can try professional mediation. In mediation, the disputing parties engage the services of a neutral third party to help them hammer out a legally binding agreement that all concerned can live with. The disputing parties can control the process and they have a chance to explain their perspectives and feelings. If you go to court, the judge will likely order the house to be sold so the profits can be split.
Ultimately, there are many decisions to make when you inherit real estate and deciding what to do with it can be a very emotional decision. If possible, try not to rush into any decisions until you’ve had time to thoroughly consider your options.
Leaving Your Property to Children? We Can Help Work Out Details to Make Inheritance a Blessing.
If you own real estate that you would like your children to inherit upon your death, let us help work out the details so their inheritance is truly a blessing. And if you have inherited real estate and want to ensure you're not overlooking anything - like a potential capital gains tax, call 440-930-2826 to schedule a free consultation. We enjoy putting to use our knowledge and expertise to provide you with the best advice.