For some people, receiving an inheritance might sound like a dream come true or it could be a torrential nightmare of legal matters.
Maybe it’s about moving into a neighborhood that you’ve always loved. There could be money involved. Perhaps you’ve never owned a home of your own, and you’re eager to see what that’s like. There might also be an opportunity to preserve family memories or obtain some emotional healing.
However, whether it’s the family farm or a nice home in the suburbs, inheriting a home isn’t as simple as it sounds.
There are surprises along the way, probate and taxes to worry about, and property issues such as insurance and repairs to take care of. There might also be the stress of having to decide how to split a shared inheritance.
No matter what type of home you’ve inherited, this quick guide can give you some ideas of what to expect.
You know you’ll be working through tax and probate issues, but other things might catch you off guard. Here are a few things to watch out for.
Sometimes people inherit homes that still have mortgages on them. If a piece of property with a mortgage on it is transferred to your name, you might receive a bill stating that the entire remainder of the mortgage is due in full.
However, if you owned the home jointly with the borrower or if you are a relative of the deceased, you don’t have much to worry about. Federal law overrides this due-on-sale clause in these cases.
If you’ve inherited a home with a mortgage and you’re not sure what to do about it, consider renting it out while you make plans. The due-on-sale clause also gives you three years of renting out a home before the mortgage on it becomes due. That gives you some leeway for finding a way to sell it or pay the mortgage.
In the United States, 50,000-60,000 reverse mortgages are taken out each year. On an inherited property, these cause a few significant challenges. First, you don’t own the title free and clear until you’ve paid back all the interest and capital that the deceased received while still alive.
Second, you only have thirty days to let the lender know how you’re going to pay that mortgage off, whether you choose to sell or rent the house or pay the money back some other way.
You’re not able to keep the same homeowner’s insurance policy that the deceased had, although some policies have provisions for limited coverage between the time of death and the time that the home ownership is transferred.
If it’s possible, try to find out in advance what’s covered in the homeowner’s insurance policy. Do some research of your own and be prepared to set up your own homeowner’s policy as soon as possible.
Clearing an inherited property of furniture, books, clothing, kitchen essentials and the clutter of normal life can be a daunting task, especially if you haven’t thought much about it. Most likely you’ll have to wait until the probate process is finished so that you don’t give away items that are designated for someone in particular.
When it’s time, enlist friends and relatives to help you. You can hold a garage sale to help clear out useful items quickly. Sort the remainder into three categories: giveaway items, trash, and recycling. Take giveaway items to the local Goodwill store and haul the rest to the dump or recycling center.
When a person dies, their home is ‘stepped up’ into the current fair market value. This means that a home that was purchased for $100,000 decades ago might now be worth $400,000. You won’t have to pay income taxes on the increase in value.
However, if you choose to sell the home, you’ll pay taxes on value that it gains from the time you inherit it to the time you sell it. If you inherit a home worth $400,000 and you sell it for $450,000, you’ll pay capital gains taxes on the $50,000 difference.
Mutual funds, stocks and retirement accounts might also be subject to capital gains taxes. If you sell a stock or mutual fund for more than the value you inherited it at, the increase in value is taxable.
Retirement accounts aren’t initially taxed; however, if you draw money out of a retirement account, that money counts as taxable income.
You might be able to roll the money from a retirement account over into an inherited IRA account. With an inherited IRA account, you can get minimum distributions rather than getting all the money at once. The funds are often set up to be completely distributed to you within five years.
There’s good news when it comes to money you receive from insurance; it doesn’t count as taxable income for federal taxes.
Depending on what state the deceased lived in and how much the estate is worth, you might have to go through probate before you receive your inheritance. Estates that are worth less than $150,000 might be able to through a simpler procedure.
Probate is a court process that allows for the orderly distribution of the property. It includes paying taxes and creditors. In the state of California, the executor of a will or someone appointed by the court will probate the estate.
Probate begins with a petition to the superior court, and a hearing is usually held within 30 days. Heirs, potential creditors and anyone named in a will is notified, and a notification is published at least three times in local newspapers.
Once the will is proven, the assets are gathered, and the executor or court-appointed representative distributes them. Besides paying taxes and creditors, items like stocks, bonds, and real estate are transferred into the names of the people identified in the will.
When that’s taken care of, the court can order that the rest of the assets be released, and the executor or personal representative distributes the remainder of the assets.
An inherited property could be a dream home, but it could also be a money trap. One of the first things you’ll want to do when you inherit a home is look for repairs that might have been deferred indefinitely. Depending on the time of year, you might need to take steps to winterize the home, as well.
For example, you might need to clean up the landscaping, seal up areas where mice and other vermin can get in, and check the furnace and safety alarms.
If someone is going to be living in the home, it’s a good idea to do some extra work to make sure it’s energy-efficient, too. This can be especially true if the home you inherited is older.
Take some time to discover where the drafts are coming in and seal them up with weather stripping, caulking or expandable foam. Check the insulation in the roof, and get a quick check-up on the furnace.
Before you begin making extensive repairs, consider taking a few photos of the house as it is. This can be helpful for preserving memories of fun holidays packed with people you love, especially if the house is small and you plan to expand it later.
Homes and other real estate are often inherited by more than one person. This can make it tricky to decide what to do with the home.
While the assets are in probate, meet with the people you’ve inherited the home with. Get the house inspected and, if necessary, get it appraised. Deal with the tax and probate issues. While that’s happening, try to come to a consensus about what to do with the home long-term.
This can be challenging, especially if all but one of the people inheriting a house want to sell it. There are several options to discuss, too. You can rent the property out, sell it outright, or have one of the people who inherited the home to buy out the shares of the others.
There are some good reasons to rent out an inherited home. It keeps the home in the family, which preserves options for the future if someone thinks they might want to move in later. It can also provide a steady stream of income. At the same time, it could be a lot of work to maintain.
If everyone is on board, selling an inherited home with siblings could be easier and more rewarding than some of the other options. You’ll have to decide how to proceed and how the money will be split.
Matters are complicated when not everyone agrees on selling the house. In this case, having the person who wants to keep the house buy out the other shares is the best option. If this can’t be done, the other parties may initiate a suit for partition to get it sold.
In a buy-out, the person wanting to keep the home can get a loan to cover the shares of the people who jointly inherited the home.
If it’s not possible to get funding, the others might offer to carry the loan by extending a promissory note. In this case, the person buying out the shares would promise to pay a specific amount each month to the others until their shares were completely paid for.
While inheriting a home can be a boon, it can also take some time, some heartache and some red tape to work through. As you move forward toward receiving your inheritance, keep this guide handy to help you and others work through the process more smoothly.