Often, people inherit property after losing a loved one. If this happens, you may have to navigate new tax obligations and decide what to do with the property. If possible, avoid taking action right away. It’ll be easier to make the right decision when you’re past the initial grieving stage.
You might feel pressure from other family members to keep or sell the property. However, there are more options than just buying or selling. Maybe the best decision for you is choosing to rent out your new property.
Consider the new responsibilities of property inheritance and explore your options before making a final decision.
Related document: Residential Lease Agreement
Taxes on inherited property
One of the first things you probably want to know is whether you’ll be paying taxes on the inherited property.
The taxes you should know about include:
- Federal and state estate tax
- State inheritance tax
- Property tax
- Capital gains tax
Federal estate tax and state estate tax is paid out of the deceased’s remaining estate, not by the heir(s). So, you don’t have to worry about paying this tax.
In some states, you must pay state inheritance tax on the net worth of your inheritance. As of 2020, Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania impose a state inheritance tax.
You must pay property tax on real estate that you own. The market value of your newly inherited property should be reassessed after the original owner passes away.
If you choose to sell an inherited property, sometimes you must pay capital gains tax on the money that you gain from the sale. The government applies this tax on the financial difference between the amount you sell your property for and its appraised worth. If you sell the property for its value (or less than its value), you don’t have to pay capital gains tax. But if you sell a property for more than it’s worth, the government taxes your financial gain.
Each state has different exemptions and tax reductions, so make sure you understand both state and federal tax laws.
Inherited property and multiple heirs
Often, siblings find themselves as co-heirs to a parent’s property. Disputes over inherited property can happen when there are multiple heirs, so communication is important.
Whether your co-heirs are siblings or distant relatives, you’ll need to discuss your options calmly and arrive at a mutual decision. So, make sure everyone has the chance to have their say and feel heard. Co-heirs must be ready to compromise.
For instance, if a parent passes away and you want to keep their house but your siblings want to sell, the best solution may be to buy your siblings’ shares. In this case, remember that your parent wouldn’t want a bitter fight between their children. Coming to a solution together prevents a lengthy legal battle and keeps your relationships intact.
If you end up retaining partial or complete ownership of an inherited property, be sure to update your Last Will and Testament.
Moving into an inherited property
Many heirs of inherited property move into the home. Perhaps you were a renter looking to buy anyway, or maybe you were already in search of a larger house to accommodate your growing family. Regardless, it’s important to consider your budget before making a final decision.
First, find out if the home has an outstanding mortgage. Typically, the deceased’s remaining estate pays off an outstanding mortgage. But if the estate is not being allocated in this way, or there aren’t enough funds, can you afford to take over the payments?
Even if the mortgage is paid off, there are other expenses to consider, including property taxes, homeowner’s insurance, utilities, and general upkeep.
If the property is significantly bigger than your current home, expect to pay more for property taxes, insurance, and utilities. Likewise, an older home may require repairs and extensive renovations that can also cut into your finances.
Once you’ve analyzed the costs associated with moving in, ask yourself these questions:
- Is the home in a suitable location for your life?
- Do you like the home?
- Can you envision yourself living there?
- Does the home fit your family’s needs?
If you’ve answered yes to some or all of these questions, then moving in might be the right decision for you. Ultimately, everyone’s circumstances are unique, so you’ll have to assess your own and determine if moving into your inherited property is your best option.
Renting out an inherited property
If you’ve inherited property in a desirable location, whether it’s a quiet suburban home or a condo in a trendy neighborhood, your best bet may be to generate some extra income by renting it out.
If you’re a first-time landlord, here are some of the tasks involved with preparing your property for rental:
- Refinance the mortgage (if there is one) in your name
- Have a professional inspect the property and fix any issues
- Undertake any upgrades that’ll make your property more appealing to renters
- Obtain a landlord insurance policy
- Research comparable rental properties and settle on a rental price
- Establish your policies, such as pet and smoking allowances
- Prepare a Residential Lease Agreement
Renting out property is a good way to supplement your income and allows you to write off repairs and other expenses. However, if you don’t have the time or any interest to become a landlord, you have other options.
You can hire a property manager to oversee your rental property. If you hire an independent contractor to manage your rental, protect your interests with a Service Agreement. But if renting still doesn’t appeal to you, selling your inherited home may be the best choice.
Selling an inherited property
It won’t be easy to sell an inherited property if the home has personal significance to you. But there are several instances when you should consider putting it up for sale.
Selling your inherited property may be the best option if:
- You’re sharing the inheritance with siblings or other family members (you can evenly divide the proceeds of the sale)
- It’s in a serious state of disrepair, and you don’t have the time or money to invest in it
- The house is in another city or state, and you don’t wish to relocate
- You can’t afford the mortgage and upkeep
If you choose to sell, it’s important to know about the obligations that are unique to an inheritance situation (on top of the usual tasks involved with selling property), including:
- Waiting for a probate court to settle the estate
- Distributing personal belongings among family and friends, and possibly holding an estate sale
- Ensuring you pay mortgage payments, homeowner’s insurance, property taxes, and utilities out of the estate while the home is still in your name
- Knowing how to report the proceeds of the sale when it comes time to file your income taxes
Inheriting a vacation home
If you’ve inherited a family vacation home, the same options apply: use it, sell it, or rent it out.
When a family keeps a vacation property for generations, you may want to hold onto tradition and keep the property for summer and weekend getaways. If the home is located in a popular vacation destination, consider renting it out when you’re not there to generate some extra income.
For example, charge a premium rental rate in the summer if the home is in a desirable location by a lake or beach. If the property is going to lay empty aside from your family’s two-week vacation, you may as well earn some money off it. At the very least, renting a vacation home can offset expenses such as property taxes and maintenance.
If you don’t plan to use the property yourself and don’t want the trouble of renting it out, your best option is probably to sell. This is a difficult decision to make, especially when you hold fond memories of the home. However, selling could provide you with the finances needed for other opportunities, such as travel.
Making a decision about inherited property
If you’re unsure of what to do with your inherited property, allow your financial situation to dictate your choice. Remember that your loved one left you the property as a gift. Honor them by making the decision that’s best for you.