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Inheriting property from your parents can be a blessing or a burden, or sometimes even a little bit of both. Deciding what to do with the property can be overwhelming, so you should carefully weigh through all of your options.
When you inherit property, your next decision ultimately comes down to three choices: move in, sell or rent. Further, your decision will depend on a variety of elements, such as your current living situation, whether or not you have siblings, your finances, whether the house has a mortgage or liens, and the physical condition of the house.
Following are some items to consider:
- Taxes. In most situations, you do not have to pay taxes on property you inherit, but if you sell the property, you will be subject to capital gains tax. The good news is that inherited property receives a step-up in basis. What this means is if you inherit a house that was purchased years ago for $150,000 and it is now worth $350,000, you will receive a step up from the original cost basis from $150,000 to $350,000. One of the first things you should do is get an appraisal done to find out how much the house is currently worth. If you sell the property right away, you should not owe any capital gains taxes. If you hold on to the property and sell it for $400,000 in a few years, you will owe capital gains on $50,000 (the difference between the sale value and the stepped-up basis). On the other hand, if you use the property as your primary residence for at least two years and then sell the property, you may be able to exclude up to $250,000 ($500,000 for a couple) of capital gains from your taxes.
- Mortgage. Does the house have a mortgage on it, whether it be a regular mortgage or a reverse mortgage? Sometimes it is specified in the estate plan that the estate will pay off the mortgage. In cases where that is not stated, you will likely have to assume the monthly payments with a regular mortgage. There are some mortgages, however, that require the heirs to pay off the mortgage immediately. With a reverse mortgage, you usually have a limited time to pay off the mortgage in full.
- Repairs. You will want to hire a home inspector as soon as possible to assess the condition of the house. If the property needs significant repairs, it may affect what you decide to do with it. Renovations and repairs can be costly and time-consuming. You will likely want to consult with a realtor before taking on any big projects because it may not make sense to spend a lot of money on repairs.
- Property Maintenance. Once you inherit the property, you will be responsible for maintaining it. The first thing you want to do if you inherit property is make sure the utilities and homeowners’ insurance are transferred to the new owners, and that they continue to be paid on time. You will also need to pay all of the property taxes and related fees associated with the property.
- Other Owners. If you inherited the property with siblings, you will all need to agree on what to do with the house. If one sibling wants the property, he or she can buy it from the other siblings. Otherwise, you can sell or rent the property and split the profits. If there is a dispute among siblings, you may need to utilize professional mediation. In mediation, the disputing parties engage the services of a neutral third party to help them hammer out a legally binding agreement that will satisfy everyone. The siblings can control the process, and they have a chance to explain their perspectives and feelings. If you go to court, the judge will likely order the house to be sold so the profits can be split.
Ultimately, there are many decisions to make when you inherit property, and the decision of what to do with it can be a very emotional one. If possible, try not to rush into any decisions until you have enough time to thoroughly consider your options.