I know that when the sad day comes that my mother has died, I will inherit a house. It will be her home, on a beautiful lake in Maine, that will be the ideal vacation getaway.
While I really don’t want to think about that “what if,” I did want to share some advice on what you need to know if inheriting a home is in your future. Thanks to the folks at Stacker.com and Belong, I can.
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What to expect when you inherit a house
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?
While I didn’t love growing up as an only child, here is where that’s a benefit. When my mother dies, I won’t have to worry about squabbling siblings. It’s just me. However, that may not describe your situation.
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 approach it with an open mind — and open lines of communication.
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. If this is the case, here are tips on staging a home to sell.
- 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 an attorney can help
A family attorney can help you in many ways when it comes to a home inheritance. One, they can give you advice. Two, they can facilitate discussions between heirs. And three, they can help put an agreement in writing so you can avoid misunderstandings or complications.
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. That means ordering the sale of the home.
Be aware, though, that this is a costly process. Also, it could erode your profits considerably when the sale of that inherited home 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 is usually what happens. You use the proceeds from the estate to clear any outstanding debts. Then, if there are remaining funds, the beneficiaries get them.
Mortgages can be a bit different, though.
If the mortgage holder dies and their home is transferred to a relative or living trust, the heirs can usually assume the mortgage payments. However, if you are not related to the deceased, you may need to watch out for due-on-sale clauses. This requires mortgages to be paid in full when a home is sold or transferred.
You would need to refinance the home at the current interest rate. If this is the case, be sure to speak to the financial institution that holds the debt. You’ll want to do this to discuss next steps.
Some people draw equity on their home during retirement by way of a reverse mortgage. If your parents did this, then 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.” Then, they will accept any proceeds from the sale, rather than go into foreclosure.
Basically, even though it sounds exciting to inherit a home, there are serious financial considerations that come with it. This is especially true if that home still has a mortgage.
In the US, the Commercial Financial Protection Bureau (CFPB) has information about how to obtain mortgage information on a home you have inherited.
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. For example, there could be residents already living in the home under a 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. However, you’ll need to get up to speed with local and state landlord-tenant laws. Plus, you need to find out the terms of your lease agreement to avoid any issues where you may be liable for compensation.
Finally, it’s likely that the residents will have the right to stay in place until their lease expires. If you’re not interested in becoming a landlord, then 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 and keep 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 than if you were to buy an investment property for yourself. In that situation, 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 I inherit 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
These are all tasks you might want to add to a honey-do list. Just make sure you get them done.
This story was produced by Belong and reviewed and distributed by Stacker Media. And Melanie Kershaw contributed.