The Ins and Outs of Inheriting a House
Inheriting a house comes with its own set of complications. There are a lot of questions that need to be answered and emotions to overcome. Figuring out what to do with inherited property can be a tough decision.
As you walk through the property, it’s easier to focus on the times you had there, instead of taxes involved, legal minutiae, or the hurdles of deciding what you’re going to do with it. You may be thinking you want to sell your inherited house, but you might not know all of the details involved when it comes to inherited property.
We’re here to help you through the different scenarios of inheriting a house, so that when you do make a decision, you can plan accordingly.
Do I Have to Pay Taxes on an Inherited Home?
If a house is left to you in a will, you might not know who’s responsible for paying taxes.
In most cases, inheriting a house doesn’t automatically make you liable for the taxes on the home. However, this is dependent on the state that the property is in. There is no federal inheritance tax, so each state has drafted its own statutes regarding how inheritance taxes are structured.
Once you’ve inherited a home, a fair market value (FMV) is determined by the IRS, creating a step-up basis. A step-up basis is used when an asset is transferred through inheritance to establish its current value. When selling inherited property, the step-up in basis will be used to determine taxes.
The stepped-up basis helps alleviate some of the tax burdens of selling an inherited property. When selling a home for profit, you’re subjected to capital gains tax. The step-up basis helps in this situation, because if you sell your inherited house for a profit, you’re only subjected to tax on the profit above the new FMV.
For example, if you inherited a home that was originally purchased for $50,000, but after inheriting it, its FMV is established at $100,000, and it sold for $120,000, then you’re only taxed on the $20,000 profit above FMV.
It’s possible to be exempt entirely from capital gains tax if you fulfill certain prerequisites. The first prerequisite is that you must make the property your primary residence for a minimum of two years out of a five-year period. Second, you cannot have used capital gains exclusion on another residence within two years before the sale.
If you meet these requirements, then you’re exempt from up to $250,000 of the profit if filing your taxes as an individual, or $500,00 if filing with a spouse.
I Just Inherited a House—Now What?
After inheriting a house, you need to evaluate several factors:
Are you inheriting a house that is paid off?
What is the condition of the house?
Was the property left to multiple people?
Did it Come with a Mortgage?
If you’ve inherited a house with no mortgage or an underwater mortgage, your options will be impacted when it comes to selling or renting.
If the property is underwater—meaning that the debt due is higher than the house's value—then you can negotiate with the bank to perform a short sale. Short selling an inherited house means that the bank has agreed to accept less money than the full amount due on the loan.
If you’re inheriting a house from someone who had multiple assets of value under their name, then the sale of them might cover the cost of the mortgage.
It’s possible that the home had a reverse mortgage placed on it by the original owner. A reverse mortgage is usually used by retirees that want to leverage their home’s equity for a monthly income. In this case, whoever inherits the house then has a window of opportunity to pay off the balance in order to keep it. If you’ve taken on a home with a reverse mortgage, the repayment of the balance due is usually procured through either selling the home or taking out a new loan under your name.
The property may have a mortgage with a due-on-sale clause. A due-on-sale clause is enacted when the original debtor transfers the property, making the mortgage due in its entirety. This is usually the case when it’s been transferred to a non-family member. If the property is transferred to a family member, then they may be eligible to take on the current mortgage installments. So, if you’re wondering, “can I inherit my parents’ house?” check with them to see if they have a due-on-sale clause with their mortgage.
What’s the Home’s Condition?
As you would with a property that you were buying for yourself, you will want to have an inspection. This will give you an overview of what you’re working with and if you have any major issues that need to be addressed.
If you plan on selling inherited property, think like a potential buyer. This means making sure that the foundation and the furnace are in good condition, all of the appliances work, and that the electrical system is up to code.
Renting a property should also account for these items. You’ll want to take into consideration some of the more surface-level details, such as painting the walls and installing new carpets.
If you don’t want to invest a large amount of time and money into making major repairs, then you should look to House Buyers of America, and we’ll buy your house as-is.
Are There Multiple Stakeholders?
If you come from a large family, the property may have multiple stakeholders. This can make things more complicated as people may have different levels of attachment to the property or be in different financial situations. This can lead to disputes, but there are options that may please everyone involved.
If you want to keep the property, but the others are looking to sell it, then you can choose to buy them out. You can finance the buyout through either personal funds or taking out a loan, but usually, the costs and fees involved will fall onto you. Essentially, buying and selling inherited property to family follows the same protocols as selling to anyone else.
However, if you want to hold on to the inherited property, but the other stakeholders want to sell it and you can’t obtain a mortgage, then you can get a promissory note. A promissory note is basically a legally binding I.O.U. in which you detail how you will pay the other stakeholders for their portion of the home in monthly installments plus interest.
If none of the parties involved want the home, the easiest solution is to sell the home and split the profits. If the property is suitable for renting, then you might also consider turning it into a rental property and splitting the profits at the end of each month.
In the unfortunate event that a decision can’t be reached, then you’ll need to take the matter to court. A lawsuit for partition will need to be filed, and a judge will usually order the home to be sold. In most cases, this is the lose-lose solution.
What to Do with an Inherited Home
So, you’ve gone through the process of inheriting a house, you know the debt involved, all the stakeholders are in agreement, and the house seems to be in proper order after an inspection, now all you have to do is decide on what to do with it.
Move in
An easy option, granted that any mortgage is reasonable given your financial circumstances, is to just move into the house. If the house is an upgrade to your current living situation and the mortgage isn’t more than the home is worth, then you can keep the home in the family, allowing your kids to make memories just like you did.
Rent it
If you’re happy with your current living situation, or if you’re inheriting a house that you can’t afford to pay the mortgage for, but is still in good shape, then you might consider turning it into a rental property.
However, being a landlord isn’t always an easy job. While you can outsource a lot of the duties, you’re ultimately responsible for maintaining a house that someone else has turned into their home.
There are obligations and taxes that come along with the passive income you’re generating. One of the tax implications you need to consider when converting inherited property into a rental is that you are no longer eligible for capital gains exclusion. As a positive, the taxes on rental income you will be subjected to come at lower rates than standard income you've generated.
Sell Your Inherited Home
You may be in a situation where the only reasonable choice is to sell your house fast. The house might be underwater, you might have multiple stakeholders fighting over their share, or you might be in need of quick cash.
When selling inherited property, you need to know what you’re getting into. You have to cover the cost of any debts left on the property and you need to perform maintenance to make it sellable. Don’t forget that you have to consider the fees and costs associated with selling a home.
If you’re considering selling an inherited house, then you want to speak with House Buyers of America. We buy houses for cash and make selling a house as easy as possible. Using our years of experience, we can give you a fair cash offer without you needing to leave the house. Call us today at 855-659-3289, or fill out our online form and take the stress out of selling your house.
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