Inheriting a house? Here are your options

Inheriting a house can be difficult. On top of dealing with the loss of a loved one, you also have to figure out what the rules are if you want to live in it, sell it, or rent it out. All kinds of legal and financial ramifications must also be taken into account for each option. It can be extremely overwhelming, especially if you don’t know where to turn for help and answers. Hopefully, this resource can provide some clarity.

How Was the House Inherited?

The process you’ll undergo will depend on how you inherited the home. There are three basic ways of inheriting a house:

• The Deed: Being listed as the “remainderman” on the deed means the house passes to you automatically. 
• A Will: If the house was left to you in a will, you’ll have to go through probate before it’s legally yours. 
• A Trust Agreement: In the case of a trust agreement, if the person had no spouse or children under 18, it should pass to you automatically. However, if they did have a spouse or young children, you’ll have to go through probate. 

The Probate Process

If the estate owner passed at least two years prior, with the help of a competent attorney, things should move quickly. Under two years, the process will be at least four months as that’s the amount of time required to post notice and wait for anyone owed money by the estate to come forward. If there are any additional complications, it could take longer.

Financial & Physical Conditions of the Property

The home’s financial status and physical condition will affect your options and timetable.

Is there a ​​Mortgage?

It’s important to do a title check to reveal any debts tied to the property, like a mortgage, liens, or outstanding debt. These debts typically follow the home, so you’ll likely inherit those as well. It’s also possible the estate may have paid off the mortgage.

A credit report for the previous owner is also vital to discover outstanding debts not attached to the house. As the beneficiary, you could be responsible for some or all outstanding debts your loved one left behind.  

If there is an existing mortgage on the property, you have several options. If a due-on-sale clause requires the balance to be paid upon transfer, you may be able to simply take over the payments, especially if you’re a relative. Otherwise, you’ll have to either pay off the remainder or sell the home.

Underwater Property

If the property you inherit isn’t worth more than the amount owed, the bank may agree to a short sale.​ A short sale is when the lender agrees to let you sell the home for less money than you owe.

This can have severe consequences, such as negatively impacting your credit, so consult a real estate attorney beforehand. Also, depending on your state and your agreement with the lender, after the sale, you may still be required to pay part or all of the remainder.

​​Does It Need Repairs?

You should have an inspection done ASAP to assess the condition the house you’re inheriting is in and what repairs, if any, are needed. If you sell it, you’ll have to ensure that there are no big issues. If you plan to rent it out, you’ll also want to address any chipping paint, stained carpet, or other aesthetic issues that may turn renters off. 

Your Three Basic Options

Once you know the financial and physical condition of the property, you and any others who are inheriting a house can decide on the best course of action. 

Move In

If you can afford the costs associated with homeownership, you may want to use the home as your residence. If there’s a mortgage on the home and you can afford to pay the outstanding amount, that’s likely best. If you can’t afford to do that, you have a few options. 

You may be able to take over the existing mortgage payments. If you do this without adding yourself as a borrower, it won’t affect your credit. If you have good credit, believe you can get a better interest rate, or want different terms, you can opt to refinance.

Sell It

If you sell, you’ll be responsible for all sale-related costs (i.e., inspection, repairs, closing, agent fees, etc.) and be subject to any applicable capital gains taxes (more on that below).

Rent It Out

While having tenants can provide passive income, it comes with its share of work and costs. You’ll be responsible for maintenance, repair, and management costs, along with property taxes and other expenses, even when you don’t have income from a tenant. However, you may be able to deduct some costs from your taxes. 

Tax Implications

Just inheriting a house doesn’t result in a tax liability. Any action taken after that will determine if you owe taxes, what kind, and how much, depending on what you choose and where you live. 

Estate Tax

The estate tax applies to the assets of a person after death. For the tax year 2022, the federal estate tax can be anywhere from 18% to 40%. However, this tax generally applies only to assets valued over $12.06 million ($12.92 million in 2023), and surviving spouses are usually exempt. Some states also have their own estate tax, which may apply to assets at lower values.

Inheritance Tax

Depending on where you live, you may also be subject to an inheritance tax. While an estate tax applies to the estate itself, an inheritance tax applies to the heirs or beneficiaries of the estate.

Capital Gains Tax

If capital gains taxes apply to you, you’ll only owe them when you sell and on a stepped-up tax basis. A step-up in tax basis means that instead of paying the difference between the home’s value when it was purchased and when it was sold, you’ll pay taxes based on the difference between the fair market value of the property when you inherited it and the amount you sold it for.

Short-term capital gains on assets sold after less than a year are typically treated the same as wages or salary and added to earned income on your tax return. For long-term capital gains held for over a year, your tax rate will be determined by your taxable income that year. 

If you use the home as your primary residence for two or more years, you’ll get a capital gains exclusion. You can also avoid paying short-term capital gains tax (the higher of the two) if you decide to maintain ownership, rent it out, and collect monthly income from tenants.

However, keep in mind the responsibilities that go along with that. You’ll have to pay the property taxes, maintain the home, pay for repairs, and afford the costs without income between tenants. If you want to sell the home within a year, you’ll be subject to capital gains taxes.

Get Proper Financial Advice

No matter what you decide to do, the effects can be huge. Make sure you have proper financial and legal advice before making any moves. They can also help you ensure that nothing slips through the cracks. This process can be complicated. However, you don’t have to deal with it on your own.  Offercity can help with any questions and provide general information on what to do when inheriting a house. We can help sell the property in as-is condition and save you the headache of making repairs and preparing the home for showings. We can also save you money by charging zero fees and commissions. Contact us for more information on selling a house that’s in probate.