Inheriting a house can offer a variety of choices in making use of a valuable asset. For example, you can sell the home and collect the resulting cash as a windfall, use the property for rental income, or live in the house and potentially reduce your overall living costs.
As you decide what to do with an inherited home, there are a few things to consider. Here’s what you need to know.
The Basics of Inheriting a House
Laws are different in each state, but, in general, if you inherit a home, you will need to go through some type of legal process. The executor of the will needs to be consulted, and there might be probate issues to resolve.
if you inherit a house, it won’t actually be yours until all the legal formalities are complete and your name is on the title.
Some of the issues the executor and probate will address include:
- Co-inheritors. Co-inheritors can impact your options, including who gets to live in the home, whether to sell the home and split the proceeds, or whether one can buy the others out.
- Liens and other claims against the property. In some cases, there might be tax liens or other claims against the home. Those need to be satisfied before claiming true ownership of the home.
- Maintenance and repairs. The condition of the home and what that condition means for the home’s value.
Consider speaking with an estate planning specialist or other professional to help you navigate the situation and review your options. You may also need to consider a mediator if you have co-inheritors who disagree with you about the best way to handle the situation.
Things to Consider
Once you’ve established your right to the home and have your name on the title, you can start trying to figure out what to do next. You’ll need to consider the impact of owning this home on your personal finances. Considerations you’ll need to make include:
- Weighing costs. If the house has significant maintenance needs, do they outweigh the value of the property?
- Tax Implications. Depending on the size of the estate and where you live, you might be subject to an estate tax or inheritance tax. Additionally, if you inherit the home and keep it, you’ll be liable for any related property taxes. Finally, if you decide to sell, you might be subject to capital gains taxes. However, those are usually figured on a stepped-up basis, meaning you only pay capital gains taxes on the appreciation since the death of the owner.
Options for the Inherited House
Regarding what you’ll do with the property, you have three options:
- Live in the home. Use the home as your primary residence or vacation home. If there are still mortgage payments, you might need to assume them. Additionally, don’t forget to factor in maintenance, repairs, insurance, property taxes, and other potential ongoing costs.
- Rent the home out. Turn the home into a long-term rental or an Airbnb. Either way, if you rent out the home, you have the chance for ongoing income. Just be aware of what could happen later when you sell the property (including capital gains tax when you inherit a home and sell it later). Additionally, if you keep the home, even for income purposes, there might still be federal estate taxes and other costs to pay.
- Sell the home. Finally, if you simply want to liquidate the asset and receive the money, you can sell the home. You might need a real estate agent to help you, and there might be other costs. However, once you sell the home, you can use the proceeds to handle any taxes you might have.
If you have a family member as a co-inheritor, you might also need to make other decisions. Perhaps they want to move in, and you need to make an arrangement. The easiest solution is to sell the home and split the net proceeds (after taxes and other costs have been paid). However, if you want to keep the home and don’t want other co-inheritors involved, you might need to buy them out.
Inheriting a house can be a way to improve your finances and make the most of your money. However, before you decide to accept the inheritance, or decide what to do with the house, make sure you consider your situation and needs to make a choice that makes sense for you financially.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.