Inheriting property can be an emotional experience—usually associated with a loved one’s passing, this property can both be a wonderful gift and a moment of hardship while grieving.
There is a complicated web of financial responsibilities surrounding inherited property which can leave many new homeowners confused about their next steps. In general, there are three options you have after you inherit real property (examples: real estate, raw land, etc.):
- Move in
Each of these options comes with their own benefits and consequences. As you go through this article, start to think about which option sounds the most beneficial to you and your family.
Deciding on the fate of inherited property is often a family affair, and the more information you have, the more logical, rational decision you will be able to make, together.
Move Into The Home
One of the top options you have is to move into the home you inherited. That sounds simple, right? But when is moving ever simple?
It is also a good idea to seek out a home inspection before you move in, especially if the house had not been updated recently. Treat this inherited home just like you would if you were buying a new home. The safety of you and your family is important and you may need to fix up big ticket items before you move in.
This situation becomes more complex when you add other people into the mix, for example, if the property were left to both you and your siblings. That action would make you both co-owners of the property and one might need to buy the other out in order to live in the home.
Communication is so important in this decision, especially if one person wants to sell the property. Try and resolve the difference between you so that you do not have to end up in court.
Rent It Out
Living in the house may not be your best option, and if the home is in an area where the rental potential is feasible, renting the home could be a great option. Renting can bring in additional income without having to sell the home outright.
But renting is not without its problems. Before you rent the property you will want to still have a home inspection and fix up any necessary problems which can get costly. Renting also requires a good deal of upkeep and maintenance which can cost you both time and money. To combat this, many people outsource this work to a management company but these companies often take 8-12% in commission which could make it more trouble than it is worth, especially if you don’t have long-term renters.
Renting is a tough option if you don’t have any experience in it. Before you rent, you should take out a landlord insurance policy because landlords are liable for many things. Be sure you choose your tenant wisely. You want to ensure you do the proper background checks, credit checks, and property checks so you will be less likely to deal with eviction.
It is also important to know that, just like any home you own, you will need to pay property taxes on the home. This is one of many additional costs that homeowners who are thinking about renting their property aren’t necessarily thinking about.
The key is for any homeowner who is thinking about renting to look at the real return after expenses, taxes, and time spent working on their rental property. Too often, people will only look at the total mortgage cost, and make sure that the rent they’re charging covers it. However, rent needs to cover not only the mortgage cost of your home – but any property taxes, or additional costs you could incur when keeping your home in great shape.
It’s Time To Sell
Your last option when you inherit property is to sell it. This option often works well for many people but there are a few points to consider before you stick a for sale sign in the yard.
Your tax liability will change when you sell the house. Thanks to a process called step-up tax basis, you will not have to pay capital gains tax on the increased value of the home throughout the previous owner’s life. You will only be responsible for paying capital gains taxes on the gain on the home from the time you inherit the property to when you make the sale.
For example, if your grandmother purchased her home for $50,000 and the new value of the home is $500,000, you would not be responsible for paying capital gains on the $450,000. You would only have to pay capital gains taxes on the gains that accumulate from the time you inherit to the time you sell.
In order to make the home more appealing to buyers, many sellers invest in fixing some aspects of the home. This can get costly so be sure to pick upgrades that will add to the home’s value and make it better for resale. Before fixing any of the house, it’s wise to consult with a real estate professional. They’ll be able to tell you whether fixing the house up makes sense, or whether you should sell as is.
When you sell the house, you will also have to decide what to do with the stuff inside—the years of family photo albums, Christmas decorations, chipped china, all of the belongings your loved ones left behind. This is an emotional experience and one that is not easy to make. You might have your family decide what things you wish to keep, what you want to sell, and what you can donate to a charity.
Assess Your Options
When you inherit property, there are many points to consider, from tax responsibilities to profits to family relationships. In this emotional time, it is important to have someone who can help you navigate your options from a financial and personal standpoint. Your financial planner will be able to walk through your specific financial options and will help you come to the best decision for you and your family.
Looking for extra guidance? Our booklet, When a Loved One Passes Away, can help with:
- Identifying immediate cash flow needs
- Administering the estate of your loved one
- Developing long-term strategies to ensure financial security
At TFS Advisors, we’re passionate about giving you honest, transparent advice to help you make the best financial decisions you can. We would love to hear from you, give us a call!
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