First, we’re so sorry for your loss. This can be a very challenging time for many reasons, and dealing with property ownership is tough at the best of times.
You’re thinking, “I inherited a house, what to do with this house?” Should I rent it? Should I sell it? How should I sell it?
Tons of options open for you, but…
… we can help.
We’re seasoned investors in CARLISLE real estate, and we’re looking to buy several houses each month in the CARLISLE OH area. Every month we get calls from those who have inherited a house and are looking to sell the house… so the info below are some tips to help you navigate the process.
What You NEED To Know About Inheriting a House
Of all the things you might inherit, few come with a fuller range of emotions than a family home. Whether you grew up in the house or just visited when you were older. Inheriting a house can bring some very complex challenges. Depending on how you came into possession of the home, there could be many potential next steps.
If you’ve recently inherited a house, you may be considering your next move. Let’s start at the beginning.
How did you inherit a house?
There is actually a big difference in how an inherited house should be handled, based upon how exactly it became yours.
Did you inherit a house by Deed?
If you were given the house by deed, you were likely appointed the “remainderman” for the deceased’s life estate. The house moved into your hands when they passed. There is no need to go through probate proceedings. If you do choose to sell, you should have no issue, as your name will be on the title.
Did you inherit a house by Will?
If you inherit the house through your loved one’s will, you have to go through probate. The probate process moves the property into your name, You will need to complete that process before you can sell the home.
Did you inherit a house by Trust?
If the deceased had a trust agreement that says you (or others along with you) get the house upon their death, it passes directly to you (and any other potential co-owners). If, however, the deceased leaves behind a spouse or minor children, you have to go through the probate process to move the title to your name.
Inheritance Tax When You Inherit a House
Selling any asset for more than you paid for it can trigger capital gains taxes. Unfortunately, you can still be on the hook for taxes if you inherited a house and want to sell it.
Inheritance tax and estate tax also need to be considered. Inheritance tax is state based, and currently only six states collect this tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Federal estate taxes are only assessed when an estate has more than $5.43 million of assets.
Surviving spouses are completely exempt from the inheritance tax. An estate tax applies to the transfer of a property after death with assets over $10 million.
Tax rates change slightly every year based on inflation and various political factors.
If You Decide to Live There
The estate may settle any existing mortgage. You then get a house free and clear of debt. The tax treatment changes as long as you live there for at least two years. You receive the current capital gains exclusions on primary residences –– $250,000 for individual taxpayers and $500,000 for married couples filing jointly –– when you eventually sell the property,
However, even if you don’t pay a mortgage, homeownership can be expensive. Property taxes, homeowner’s insurance, liability insurance, heating, electricity and general wear and tear can make a huge dent in your finances.
If You Decide To Rent It
Renting the property is an option if you don’t want to sell or live in the house. Renting can provide some monthly income. That is a good idea if the beneficiary of the house is near retirement. However, all the maintenance, repairs, and taxes are your responsibility. There can also be gaps in between tenants if you don’t have a long-term renter.
What You Can Do When You Inherit a House
Three main options exist when a home is inherited by you and your family. Basically, the heir or heirs can choose to occupy it, sell it or rent it out. Here’s a general breakdown of what each choice means:
- Occupying the home means it will stay in the family, which can be appealing if there are memories connected with the property. If there is no mortgage, this can be an economical option as well.
- Selling the home provides immediate cash, assuming it is worth more than the mortgage after necessary repairs. This can be a relatively quick and easy way to make the most of a home inheritance without adding any future risks.
- Renting the home can provide passive income and even some tax advantages. However, becoming a landlord involves costs and coping with tenants can require a lot of time and attention.
Managing Taxes When You Inherit a House
Inheriting a house doesn’t usually trigger any tax liabilities by itself. There is no federal inheritance tax, although larger estates may have to pay federal estate taxes. Six states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. In all of these states, a spouse is exempt from paying inheritance tax. Children and grandchildren are exempt from inheritance tax in each of the states except for Pennsylvania and Nebraska. Exemptions vary by state for siblings, aunts, uncles and sons-in-law and daughters-in-law. You will likely face higher inheritance tax rates if you aren’t related to the deceased.
Capital gains taxes may come into play if the heir or heirs choose to sell the house. Capital gains taxes are federal taxes on profits gained on the sale of assets. Short-term capital gains taxes apply on sale of assets owned for a year or less. Long-term capital gains taxes are levied on sale of assets owned for more than a year.
king Care of Financial Issues When You Inherit a House
If the home has a mortgage the need to keep making monthly payments has to be considered. Most mortgages can simply be taken over by the heirs. However, if there is a reverse mortgage, a type of home loan available to seniors ages 62 and older, the ownership of the home will transfer to the mortgage company on the death of the owner.
Another issue arises if the house is underwater, with a mortgage balance more than the home’s value. In that case, the new owners may be able to convince the lender to do a short sale, selling the property for less than the loan balance and accepting that amount to settle the debt.
If the home is paid off and has no mortgage, there may still be significant financial considerations if the home needs costly repairs before it can be sold or occupied. Ongoing costs for property taxes, utilities, residential insurance and maintenance costs, including home owner association assessments, also need to be factored in.
I Inherited A House, What To Do Next?
Here’s a few important considerations to help you make the right decision:
1) Make sure the mortgage is paid.
This may sound obvious, but if the person who left you a property also had a mortgage (unless it had no mortgage and was paid off, which is great!), you have to pay it (assuming you want to keep the property). Some banks will allow you to assume the loan, while others may force you to refinance into a new loan. If you don’t qualify for a new loan, renting may not be an option for you.
2) The investment is only as good as the manager.
If dealing with brokers, maintenance, tenants, rent collection and all the nuances of property management isn’t the best use of your time, hire a professional to help you or cash out now. Some people who inherit homes decide to keep the house and rent it for extra income. That’s a great strategy for sure. You just need to be prepared to manage the property and the hassles that can go along with tenants and toilets.
3) Property ownership costs money.
It’s rare to see a building that’s been perfectly maintained. Most inherited houses need major improvements.
Consider hiring a professional property inspector to give you a detailed rundown on what you’ll need to do within the next five years, along with estimated costs. Surprises are very, very expensive.
4) Selling a property for top dollar costs money.
If you don’t want to deal with making repairs, updating kitchens, improving landscaping and overall cleanup, don’t worry. We buy CARLISLE houses for cash, as-is.
5) If the market will continue to grow faster than your other options, hang on to the investment.
We can help you analyze the value of your property today versus the long-term benefits of renting. If you can use the equity in your property in another way that outpaces the performance of the real estate market, you should. If you don’t have anything better to do with the money and the neighborhood is rising in value, hang on – real estate can be a great investment if you know how to correctly read the market.
6) Uncle Sam wants a piece of the action.
Don’t forget to discuss your inheritance with tax and legal professionals before you take action. There are major property and income tax consequences that will dramatically impact the cost of owning your investment.
7) Consider all your options.
In certain situations we may be able to help you structure a lease-option agreement that allows you to rent and sell at the same time – capturing the best of both worlds. These kinds of deals can be complicated, but our Carlisle investment experience can help you win.
8) Compare a few scenarios.
We’ll help you determine prices for any property near Carlisle – if you sold it today without doing any work, the highest price the market will bear, and the projected value of keeping it as a rental (along with the costs).