Inheriting a house can be a huge responsibility. While it can be a blessing from your family members, it also can be an emotional process to go through. Most of the time we inherit a home from a family member has died, which then leaves you with decisions that you need to make for yourself and the house. It can be stressful.
If you find yourself in a situation like this, it is best to look at all your options. Look at your finances, can you afford to live in this house, or should you sell it to make a profit? It is helpful if you look for guidance from an expert who has experience with legal and tax requirements.
Do I Have to Pay Taxes on Property I Inherit?
When you learn that you have inherited the house, you probably will have a lot of thoughts running through your mind. One of the thoughts may be if you must pay taxes on the property that you inherited. That answer depends on your decision.
Whenever you own property, you have taxes called capital gains taxes. This is what you pay the government based on the profits you make from any investment sales. Capital gains taxes are can be paid on a few different items, like when you purchase a property and try to turn around and sell it. Normally you would not pay the capital gain taxes on the sale if you have lived in the house for a minimum of two years.
Paying capital gains taxes is based off the rate of your taxable income. When inheriting a house, you will be protected from a good amount of the capital gains taxes because it would technically be step-up tax basis.
What is a step-up tax?
Becoming a recipient of an inherited property means that step-up taxes are a benefit. This means that when you inherit a home at the market value, you will only have to deal with the taxes based on any gains between the period where you inherited the home and when you sell the property.
To show an example, imagine that you just inherited a house from your grandmother. It had been purchased in 1965 for $25,000. So now, in today’s time, the house if valued to be around $400,000 what does that mean you could possible be taxed. Thankfully, you would not be taxed on the $375,000 profit. The only tax you would have to pay is the gains during the time between receiving the home and when you decided to sell it.
I Just Inherited Property. What Do I Do Next?
Figuring out what to do with inherited property can be difficult at times. A major factor that plays into deciding what to do with the property is looking at the financial status. Another factor is determining the condition of the home.
Does the property have a mortgage?
Sometimes when you do inherit a house, there may be a mortgage on the home. The quicker you know the details about the mortgage, gives you the proper time to figure out what you can do with the house. Some options are:
- Reverse mortgage: This is a popular financial product with older homeowners who are looking to access some money from within their home. They can get the money without moving and the original owner can receive the ongoing cash for the house’s equity and repaying the loan when they move out. If the original owner dies, the beneficiary has about six months to repay the amount that is due. This means you will have to pay the balance with your own money, must sell the home to satisfy the loan, or apply for a new loan to cover the old one.
- Due-on-sale clause: If you have this on the mortgage, it states that the loan is due and payable if the owner transfers the property to someone who is a non-family member. This clause helps make it necessary for the person to pay off the mortgage in full or sell the property. If you are a family member who has inherited a property, you can normally assume the mortgage payments instead.
- Mortgage paid off by estate: If a person is leaving you a home, you may have had a mortgage on the property. Sometimes the mortgage could have been paid off by their estate, which leaves you with a home that is basically free.
Does the property need repairs?
When you inherit a home, you need to always do an inspection yourself or hire a person to inspect the house. This is always a good idea to do in general, just in case you are not sure about either keeping the house or selling it.
- Fixing up to sell: Like I mentioned above, it is always a good idea to get a home inspection whenever you inherit the property. This allows you to know about all the damages and prepares you for how much you will need to spend, to make the house presentable to sell. While the inspections can cost you a pretty penny, you can turn around and add that cost into the selling price of your home, so you get your money back. Important places to make sure to check would be – foundation, roofs, windows, and the furnace (if you have one).
- Repairing for renting: While renters may be living in the house for a short period of time, it is important that the house is fixed before they move in. Renters do prefer to have a house that is fixed, that way they don’t have to call the landlords to make complaints or ask them to send someone to fix a repair that was missed. You want the renters to feel at home with a fresh coat of paint, newly placed carpet, and of course applications i.e., air conditioner that work smoothly.
What Are My Options for Inheriting a House?
Now that we have gone through some of the pre-steps to dealing with an inherited house, it is time to look at your options for the inherited properties. I think it is important that you go through the process I have talked about above this point. You want to make sure you understand all the finances, taxes, and even time it will take to go through the process. Once you have understood the process, you can begin looking into what to do with the house.
There are about three main paths you can take when dealing with this situation. You can either move in, rent it, or sell the home.
Moving into the home can be your best option if you know for sure that the mortgage has been taken care of. Whether or not the mortgage has been paid for or you are having to make payments, you will be responsible for all the care that the house will need. Maintenance on a house can sometimes be expensive, especially if it is an old problem that has not been taken care of for a while.
When you inherit the house and chose to move in, you will be responsible for the yearly property taxes that you will have to pay as the new owners of the house.
Renting the House
Like I covered above before this section, sometimes renting out your house is the best option because it can provide you with an extra source of income. It is important though, like I said before, that when renting out your house, it needs to be fixed and have all the repairs taken care of. It needs to be rental ready. Once you have all of that taken care of, you can begin to figure out the cost of living there per month, plus the additional potential costs’ of 24/7 maintenance care.
When you are renting out your home, you are still responsible for the property taxes. However, since you are renting out your home, you could be eligible to deduct the expenses related to the house. That is why I stress the importance of taking care of the house while renting.
Selling the House
I consider this to the be last option when dealing with an inherited property. If you do not want the responsibility of dealing with another home, because you already own one or do not want to deal with renters, then this would be your best option. When you sell your house, you are responsible for covering any cost like listing you home, the repairs, finding a real estate agent, and event the staging and closing costs. When you look at it, it seems to cost more to sell the house than it does to move in or rent it out.
Looking at it from a tax perspective, if you fall within a certain tax bracket, you will have the be required to pay the capital gain tax that we talked about in the beginning. This will be the difference between the market value of your home and what you sell it for.