What to expect when you inherit a house and how to handle it
What to expect when you inherit a house and how to handle it
What happens when you inherit a house? It's a question that is often asked at an emotional and stressful time in a person's life, when faced with the prospect or reality of losing a loved one.
Inheriting a house comes with many financial decisions and tax implications to consider. You'll also need to involve any other benefactors, such as siblings. Belong breaks down some of those key decisions and who can help you navigate them.
What happens when you inherit a house with siblings or other people?
One may want to sell, another may want to hang onto the home to rent or even move in. The shared gift of a home can be a tricky situation to navigate. It's important to expect some bumps along the way, but to stay open with communication and try to respect everyone's opinion.
You'll need to work together to come to an agreement that works for everyone. Your options include:
- One person buys out the other/s, either in cash or by financing part of the home's value to either move in or use the home as a rental property
- Sell the home and split the profits after expenses
- Rent out the home and share the profits after expenses
- Allow one person to move in and owe rent to live in the home
How to handle inheriting a home with beneficiaries
Regardless of the decision you come to, a family attorney is the best place to start. This will help you to get advice, facilitate discussions between heirs, and have an agreement put in writing to avoid misunderstandings or complications after a decision is made.
If you and the other beneficiary/ies can't agree, a family lawyer can also advise next steps. You may need to file a suit for partition, ordering the sale of the home. Be aware that this is a costly process and could erode your profits considerably when the sale comes through.
What happens when you inherit a house with outstanding debts?
If the home you have inherited has a mortgage or outstanding debts against it, this could influence any decisions you make. In most instances, proceeds from an estate are used to clear any outstanding debts before any remaining funds are transferred to beneficiaries. Mortgages can be a bit different, though.
The deceased estate may have been used to clear the mortgage, or there could still be money owing on the home. Be sure to speak to the financial institution that holds the debt, to discuss any clauses.
If the mortgage holder dies and their home is transferred to a relative or living trust, the mortgage repayments can usually be assumed by the heir/s. If you are not related to the deceased, you may need to watch out for due-on-sale clauses, which require mortgages to be paid in full when a home is sold or transferred. You could need to refinance the home at the current interest rate if this is the case, so seek professional financial advice specific to the home and your situation.
Some people draw equity on their home during retirement by way of a reverse mortgage. You'll need to speak to the lender about how to satisfy this loan and the time restrictions on doing so. You may need to refinance this loan, use your own funds, or use the proceeds from a home sale to close this mortgage.
If the property you are inheriting is worth less than the outstanding debt against it, the lender may agree to a 'short sale' and accept any proceeds from the sale, rather than go into foreclosure.
How to handle inheriting a home with a mortgage
Again, this is a scenario where a family attorney is a good place to get legal advice on how to handle your specific situation. In the US, the Commercial Financial Protection Bureau (CFPB) has information about how to obtain mortgage information on a home you have inherited, as well as a list of HUD-approved counseling agencies and a hotline for anyone with questions relating to consumer finance and treatment from lenders.
What happens when you inherit a rental home?
What happens when the house you have inherited isn't used as a main residence, but as a rental home? This adds another layer of complexity to the matter, as there could be residents already living in the home under a 12-month lease agreement.
In this case, you and your family could wind up being what's commonly known as "accidental landlords". That is, someone who inherits a house along with a whole host of responsibilities that come with managing a rental property.
You still have the option to sell or move in, but you'll need to get up to speed with local and state landlord-tenant laws and the terms of your lease agreement to avoid any issues where you may be liable for compensation. It's likely that the residents will have the right to stay in place until their lease expires, or you may want to look for a buyer who is interested in a tenanted investment home.
How to handle inheriting a rental home
The easiest option in this scenario is to continue renting the home, keeping the residents in place to avoid breaking any legal agreements. When the tenancy is due to end, you (and the other heirs, if any) can decide what to do with the home going forward.
Continuing to rent the home can be a beneficial option. Besides enjoying passive income, the IRS will consider the value of the home on its current market value, known as a "stepped up basis." This means that when it comes to capital gains tax if/when you do sell the home, the appreciation will be based on the value that you inherited it at. This is a big difference to if you were to buy an investment property for yourself, where appreciation will be based on what you paid for the home. You can learn more about the tax considerations for inherited homes here.
Whether you're inheriting a home as an individual or as a family, it's important to get help with managing your new home and residents. You should also ask a lawyer or financial advisor about whether it's a good idea to transfer the property into a limited liability company (LLC) to manage, depending on the personal circumstances of you and/or the other heirs. This can keep your own personal and business assets separate from the inherited home.
If you're continuing to use the home as a long-term rental, you should be able to deduct the costs of lawyers and accountants for any advice or services relating to managing the home.
What are some of the tasks I'll need to do after inheriting a house?
In addition to all the major decisions, there's a fair bit of little housekeeping details that can be overlooked after inheriting a house. Be sure to:
- Order an appraisal, to have a record of what the home is worth at the time of inheritance (essential when it comes to tax time and making financial decisions)
- Keep paying insurance premiums, either transfer them from the previous owner or take out a new policy/ies and don't let them lapse!
- Transfer utilities to avoid having them switched off
- Keep HOA fees paid up
- Continuing upkeep of the home and gardens to avoid it falling into disrepair
- Find out if there is any finance on the home or unpaid property taxes due
- Research options for professional advice on legal and financial matters