It’s easy to dream of inheriting property—the mansion on the hill, the lakeside cabin, or the family farmhouse.
It’s not so easy when it actually happens. Even when it seems like a windfall, there are often hidden costs associated with inheriting property. Most inherited homes come with a to-do list, too, and none of it can wait long.
You need to decide how to handle taxes, deferred maintenance and utility issues, and what you’ll do with the property in the long run. Where do you start? Do you know what to do with an inherited house?
Get a good tax attorney to help figure out what to do with an inherited house
There’s a lot of paperwork involved in inheriting a house and some complex tax issues to deal with. For starters, you’ll need to figure out whether or not you’ll need to pay capital gains tax. You’ll also need help clearing the title and getting the house transferred into your name.
The ins and outs of capital gains tax
When someone dies and bequeaths their property to someone else, that property is immediately ‘stepped up’ to fair market value. That means when you inherit the home, you inherit at today’s fair market value rather than on the price the deceased paid for it.
If the home continues to gain value, you could be required to pay taxes on the amount of its increase after the date that you inherit it. Your tax situation will vary depending on what you decide to do with the property in the long run.
If you move in and live in it for two years, you get capital gains exclusions when you finally sell it. If you don’t live there and sell it, you could be taxed up to 20 percent (based on your tax bracket) for the difference between its fair market value and its cost when your deceased family member purchased it.
Work out the details with family members
Often when a home is inherited, it’s inherited jointly by more than one family member. This complicates matters, especially when all but one of the family members wants to sell it. Try to come to a consensus about the property as soon as you can.
This includes how you’ll deal with the items left in the house. Try to clear it out quickly to help release some of the emotional tension and get it ready for new residents.
Get the home inspected
While your attorney working to clear the title and get your capital gains taxes in order, have someone inspect the home. If the house was lived in for a long time, there are likely a lot of repairs that have been neglected. Find out what they are so you can address them.
Likewise, contact the utility companies. Make sure all the bills are up to date and switch them to your name. You’ll want to keep essential utilities on at least until you decide what to do with the home long-term.
Check into the mortgage and property taxes, too. Keep all the payments up to date.
Make the long-term decision
Decide how you’re going to handle the house long-term. There are three options—move in, rent it out, or sell it.
Renting it out can be a good option for those who are close to retirement. It can bring in a little extra money while you wait for the market value to increase, and you can write off expenses for repairs.
Moving in is an easy option if you’re the sole inheritor. If you’ve inherited the property with someone else, you may have to buy them out in order to move in.
Selling is the best option in many cases. When more a group of people inherit a house together, selling it and splitting the profits can be the most amicable way to deal with the emotions that come up. If it’s run down, you can make the most necessary repairs and sell it as-is so that it doesn’t become a money trap.
There’s also the possibility that a home may not appraise well. In this case, you could ask the bank for a short sale so you’re not saddled with property taxes and mortgage payments.