Did you just inherit a house from a parent or loved one but aren’t sure how to get legal ownership or what kind of financial implications you will face?
If so, we are here to help by telling you the ways in which you can get ownership over the inherited property so there are no headaches later on. But as with any real estate transaction, we highly recommend you take the inheritance process step by step with experienced experts so you are not burdened by financial or legal issues.
You Inherited A House–Now What?
When you find out that you have inherited a house whether from friends, relatives or parents there are some financial, legal and tax issues that you should make sure you are aware of.
Below are the three main factors you need to consider.
- What are the legal responsibilities for the home? Is there an outstanding mortgage are there utilities that are past due?
- Decide if you will sell the home, find a renter or use it yourself. If there are multiple people involved in the inheritance, like a brother or sister, you will need to make these decisions together.
- What kind of tax liabilities will you be responsible for based on what you decide to do with the estate. Will there be estate taxes or capital gains taxes due?
You’ll want to get in touch with a lawyer to discuss all of the options you have to get full ownership of the house. They may also assist in updating the homeowner’s insurance policy to help ensure that coverage will continue.
Then you can discuss whether you will sell it, rent it, or move in. Your lawyer is a great resource because they can look at the mortgage on the house to see which option is best for your circumstances.
If you would like to live in a house that has joint ownership, then you and the lawyer can work together to decide what their compensation should be.
After talking to your lawyer they will provide you with papers to get legal ownership. This may sound easy as pie but there are a few things that may pop up that can make the process a bit harder.
Is There A Mortgage On The Home?
If the inherited property has a mortgage, the details of this mortgage may affect how quickly you can sell the home down the road or even rent it out. You should look into the mortgage to see if there’s any of the following wording.
The due-on-sale clause states that the entire loan out on the home is due and payable when the borrower transfers the property to someone. This is especially true when it’s a non-family member.
This clause makes it necessary for you to pay the remaining mortgage in full or to sell the property. When a family member inherits a home with a due-on-sale clause they can just pick up the mortgage payments where the original buyer left off.
A reverse mortgage is a financial product that is popular with homeowners that are older and you may find your parents has this type of mortgage. They usually have this type of mortgage applied to their home when they want to access the equity without moving.
This means that the original owner will receive ongoing cash payments for the equity in the home. Then they will repay this loan when they move out or when it is sold.
Upon the owner’s death, the beneficiary will have a limited amount of time to pay the loan back. This small time frame is usually 6 months.
If you’re the beneficiary this means that you’ll need to pay the loan balance with your own funds. You also have the option of selling inherited homes to satisfy the loan amount or even taking out a new loan in your name.
If you have inherited a house where there is more owed on the mortgage than the house is worth (known as underwater), the bank then may let you do a short sale on the home. In this case, the bank will be willing to accept less for the house than what the remaining loan amount is.
Mortgage Paid off by the Estate
If the inherited home was paid off by the estate of the original owner, then you’re in the clear. You’ll get the home for free and not owe anything on it.
What Happens When You Inherit a House With a Lien?
If a property is inherited with a lien then you must be aware that the lien travels with the house. In this case, if the original owner dies then those who inherited the house will also inherit the lien.
Usually, the lien holder will sell the house to pay the lien in full. A lien is a legal document that gives a creditor an interest in the property of a debtor. Such things like property tax debt can become liens without any court action.
In other cases, the debtor must go to court to have a lien taken out on their house. When this debtor dies usually the property will be collected and distributed among their next of kin or beneficiaries in a court process known as a probate.
In the probate, the person in charge will be responsible for paying off the debt before the assets are distributed among the beneficiaries. If the deceased party had a lot of money in an account or in investment accounts, then the beneficiaries may choose to pay off remaining debts with this money.
After the debt is paid in full then the title and land will be passed onto who is in the will. If there is no will then the property will go to the next of kin.
What Happens When You Inherit a House With A Sibling or Others?
Inheriting a house with a sibling or loved one may be a sticky process since technically both of you are meant to get the property and there are a lot of decisions that need to be made. If your parents left you and your brother, sister or other family members real estate, there are a few options you can consider.
The first thing you can do is offer to buy out the home if you want to keep it. It’s assumed that if you have one other sibling then you and your sibling own the house 50-50 unless it’s stated otherwise in the will.
If one of you wants to keep the house but the other wants to sell you have the option to buy your sibling out. You can work out what compensation your sibling wants for the house and transfer the deed into your name. Sometimes this can be as much as paying your sibling for half of the house and it can be as cheap as just paying for closing costs.
You also have the option to arrange a private agreement. This is great for siblings that don’t qualify for a mortgage. If you’re the sibling that wants to keep the property, then you can make long term monthly payments to your sibling to get the house.
You can also consider a sale of the home and split the profits and financial implications from the sale or rent the home and split the rental income.
What Are The Tax Implications When You Inherit A Home?
You will be happy to know that inheriting a home does not come with the responsibility of a federal inheritance or estate tax.
But, there may be an inheritance tax in your state so you will need to find that out. Typically the state’s website will have this kind of information available or you can consult with a tax professional to help you.
You do not incur a tax liability right away when you inherit property, the tax implications will arise based on what you decide to do with the property.
When you inherit a home the IRS will establish a fair market value (FMV) for it typically upon the owners’ date of death. This becomes the new tax basis for the property which is also known as a step-up basis.
The step-up basis value will help to influence what you might have to be responsible for if you were to sell the house in the future.
As an example, at the time of death a home was given a fair market value of $500,000, this is your tax basis. If you sell it for $550,000 after you inherited it, you would only have to pay capital gains on $50,000 – or the profit.
If you decide to keep the house, then you may be eligible for an exclusion of capital gains taxes. The IRS states that you may qualify to exclude up to $250,000 dollars of that gain from your income. If you file with a spouse this could even go up to $500,000 dollars.
There are two criteria you must meet to qualify for an exclusion of capital gains taxes. First, you must use the home as your primary residence for 2 years out of a 5-year period. Second, you can’t have used the capital gains exclusion on another home two years before the sale.
What To Do With Your Inherited Property
Now that you have some real estate that you have inherited, you need to determine what to do with it. At this stage in the process you should know the financial details, the condition the home is in and have had discussions with others that may be involved, like your siblings.
Option 1: Move Into The House
Move into the house and make it your permanent family home. You may choose to do this if the inherited house has special meaning such as it’s the house you grew up in with your parents. From a financial perspective you will take on any mortgages that exist and other fees like utilities, HOA fees etc. There will be no other tax liabilities if you decide to live on this piece of real estate other than property taxes. Two other things to consider is that the mortgage balance of the home may exceed the value of the home or the home may be more than you can afford. You should speak with a financial planner about both of these to see how to best keep your finances in shape.
Option 2: Sell The Home
You will have some financial expenses that may include real estate agent fees and any home repairs that are required before the sale. You may have to pay capital gains tax if you are in certain tax brackets so be sure you understand your tax liability before you decide to sell. This would be difference between the sale price and the fair market value from the date you inherited it.
However, a faster and easier way to sell the house would be to sell to a cash home buyer such as Move On. A cash home buyer will purchase the property as-is, so you won’t have to worry about repairs or improvements and you won’t ever pay closing costs or real estate agent commissions. This also might be the most convenient way to sell if you live in a different state than the house you have inherited.
Option 3: Rent The House
Find a renter if you are not ready to sell, but do not want to live there. To prepare your real estate for tenants you will need to put out some money for repairs and may have ongoing fees for ongoing maintenance or possibly a property manager. There are no major tax implications but you will need to pay property taxes on the home. You can also talk to an accountant about deducting costs for maintenance on an ongoing basis.