If you’ve inherited a house, it’s common to say, “I inherited a house. Now what?” The process that follows can be confusing and full of emotion. You’re likely in this situation due to your parents’ or another loved one’s death, and it’s common to have many questions about what to do.
Bottom line, your decision comes down to one of two things: Keep vs. Sell the home. To help steer your choices, you need to understand an inherited home’s financials and tax implications.
Table of Contents
- I inherited a house. Now what about estate taxes?
- Will I have to pay capital gains tax?
- I inherited a house. Now what about property taxes?
- I inherited a house. Now what about mortgages and liens
- Repairs and deferred maintenance
- Should I be a landlord and find a renter?
- How close do you live to the house?
- When Siblings Inherit a House
- I inherited a house. Now what? – Summary
I inherited a house. Now what about estate taxes?
Your accountant and attorney should examine your need to pay estate taxes, but in general, you will likely have to pay. Many people find that they have to sell the home to pay the federal government’s inheritance tax. Estate taxes are taxes imposed on an entire estate before distributed to the beneficiaries, with the amount based on the estate’s value at death. These taxes get imposed regardless of your decision to Keep vs. Sell. Some refer to this as an inheritance tax, but it is only one of the tax implications to consider.
Will I have to pay capital gains tax?
The news is a bit better with capital gains taxes. In short, you will have to pay capital gains taxes, but you, the beneficiary, should benefit from something called a “step-up” in tax basis. A step-up in basis restarts the clock, and the tax basis gets assessed on the value of the home the day the owner died. The only capital gains due is the difference between the fair market value and the sale price.
The owner purchased the house in 1968 for $32,000. The owner died a month ago, and at that time, the home’s value was $286,000. The owner’s child inherited the family home and sold it today for $296,000. The child beneficiary is only required to pay capital gains taxes on $10,000 ($296,000-$286,000).
The step-up in basis makes it a fair process to sell a home shortly after inheriting without getting hit with large capital gains taxes.
Additionally, if you use the home as your personal residence, you may qualify for a capital gains exclusion.
I inherited a house. Now what about property taxes?
Short-term property tax liabilities
In real estate, property taxes are a certainty. One of the first things to do when you inherit a house is to check on the property tax situation. It’s common for someone to receive an inherited property and a significant property tax liability to go along with it. One of the first things you may need to do is get the property taxes current or face the local government coming after your inheritance.
An experienced house buyer can handle the process of getting all these taxes paid at closing, with nothing for you to do. Some of them will also buy the home in as-is condition and pay all closing costs.
Long-term property tax liabilities
If you decide to keep the home, one of your many considerations is to budget for the yearly property taxes and increases to go along with it. Local governments have a way of raising those taxes in high amounts all at once. In 2020, Nashville council members approved a 34% property tax hike. The decision met much protest but went through regardless. The tax increase placed a burden on many people running with inadequate cash flow on their inherited property to pay for the large hike in prices.
If you inherit a house and decide to keep it, be sure to budget for future tax increases outside of your control.
I inherited a house. Now what about mortgages and liens
Capital gains tax and other taxes are far from the only finance-related considerations when dealing with inherited property. If you lean towards keeping the home, it’s wise to pay for a title search to determine all mortgages and liens on the title.
If you inherit a home, you’ll want to determine the mortgage balance on the property. Often, this can consist of a primary mortgage and a home equity line of credit loan (HELOC). You’ll have to pay interest to keep both of those loan types in place. HELOCs come with an extra word of caution, in that they come with a balloon date, which is when the lender wants the loan paid off in full. If you decide to keep the home, you’ll need to continue making both the mortgage payments and the payments for any other associated loans.
If you want to keep your home inheritance and have an old mortgage on the property, one option is to refinance to take advantage of today’s favorable interest rates.
One worthwhile option is to sell the home to a dependable home buyer who can handle getting all mortgages and loans paid off on your home. You want one who can get the deal closed and will offer you market value for your home.
A sometimes overlooked hurdle with inheriting real estate is the presence of a lien (or liens) on a property.
Liens come in various flavors and are a way for others to ensure that property cannot sell without them also getting the money owed. A “mechanics lien” is common and results from a service company placing a lien on the property for unpaid work. Perhaps the owner replaced the roof but never paid the company. You may be on the hook to get that paid off after inheriting the house. There are many, but a couple of other liens are HOA, state income tax, and federal income tax liens.
Repairs and deferred maintenance
Even if everything lines up in your favor financially, there are other considerations when deciding what to do if you inherit a home. Commonly, the house will have some deferred maintenance and need repairs. It’s a fact that most real estate homeowners, and even seasoned investors, will underestimate the extent of repairs needed on a given home.
If you wish to keep your home inheritance, you’ll want to get a home inspection sooner rather than later. Sometimes the gift of a home turns into a hidden disaster, so be sure you understand the work scope required to rehabilitate the house back into good condition. You’ll also want to consider the ongoing maintenance costs associated with owning the home. You’ll want to budget for a roof, HVAC, updated plumbing, updated electric wiring, and other big-ticket items.
If the thought of making repairs and managing contractors seems too daunting, one excellent option is to sell the home to a dependable home buyer who will buy the house in as-is condition.
Should I be a landlord and find a renter?
Renting out the home could be an option for you. There are some tax advantages of doing so, and it’s something that works out for some people. Properly managed, a house can provide enough rental income to outweigh the headaches and maintenance costs.
If renting out the house sounds like the way to go, you need to decide if you will manage the property on your own or use a property manager. Both have their pros and cons.
Self-managing the property
Managing the property on your own signs you up for an extra job. For example, if a water heater busts at 3 am, you will get a call. If you happen to miss the tenant’s call, it’s your property that floods because the tenant doesn’t know how to shut off the water.
Using a property management company
Property management companies bring a different set of issues. For starters, their job is to take as much of your cash flow as they can. You’ll need to know most parts of their job to know how well of a job they’re doing. Are they charging the right amount in rent? Are they fixing too little or too much? Are they feeding their contractor unnecessary work as part of some kickback scheme? These are real issues that happen all the time.
Whatever the case may be with managing the property, you will likely have issues with problem tenants if you keep the house. A tenant is unlikely to maintain your property at a high level. Also, if they stop paying, you will find that it’s getting harder to evict. You could get stuck with a non-paying renter and minimal legal recourse.
If you inherit a house and wish to be a landlord, our advice is to self-manage the property for a couple of years before switching to a property manager. You’ll need the expertise to protect yourself. It will better equip you to formulate a plan if you encounter a property manager that seems to be up to no good.
If being a landlord sounds like a headache, you should consider selling your home to someone who will buy it as-is and pay a fair market value.
How close do you live to the house?
When making decisions about your inherited property, you’ll also want to consider your proximity to the home. If you keep the property, rent it out, and it becomes in need of repairs, will you be able to drop everything and run over there to make the repairs? The farther you are away from the house, the more immense the burden that becomes.
When Siblings Inherit a House
An additional complication is when more than one person inherits a part of a house. It’s seldom the case that family members owning property together concludes with a happy ending. Parents mean well by leaving the property to their children, but the children usually have different ideas of what they should do with a property.
When inheriting a house in this situation, the easiest solution is to sell to an experienced home buyer who will give a fair offer on the home.
I inherited a house. Now what? – Summary
It’s common for someone to say, “I inherited a house. Now what?” What to do with an inherited house is a much larger decision than many people realize. In the right situation, keeping the home can be a beneficial situation. However, for most people the best option is to sell. As-is home buyers can help homeowners in many different situations, including when it’s a home they’ve just inherited.