So You Inherited a House, What's Next?

I Inherited a Home, What's Next?

So......you just inherited a home and have no idea what comes next. Rest assured, you are not alone as home inheritances are becoming more and more frequent. In the next 4 decades, Boomers stand to inherit upwards of $27 trillion from their parents according to The Center of Wealth and Philanthropy at Boston College. A large portion of that includes the house their parents lived in.

But when that house becomes yours, figuring out what to do with it can present financial and emotional issues. When siblings are involved, things can get even trickier.

What call you do with your home windfall? You will have 3 choices: Sell it, keep it, and either move into it yourself or rent to someone else. Read on as we further examine your options.

Selling Your Parent’s House  

A few years back, some friends of mine inherited their family home, along with 5 other siblings. The home was completely paid off and had appreciated in value substantially since their parents had first purchased it in the 70's. 

Since all siblings agreed they wanted to cash out (minus 1 who couldn't afford to buy the others out)  they contacted me for recent comparable sales to price it right and to agree on a minimum amount they’d accept.

In spite of the appreciation, my clients, upon speaking to their family attorney, knew they’d most likely avoid owing capital gains taxes on the sale. The attorney had instructed them that beneficiaries receive a stepped-up basis, which is the property’s fair market value at the date of the parent’s death. So, essentially when you sell, you only pay taxes on gains over that basis. Currently, long-term capital gains run upwards of 20%, depending on your tax bracket.

Looking at comps and deciding on a minimum price are good ideas if you plan to sell your parent’s home. You’ll also want to make sure all property taxes, mortgages, utility bills and homeowners insurance is paid up.  Take special care to ensure that the estate or trust is named as the insured on the homeowners policy, in case anything happens to the home between your parent’s death and the sale.

A common pitfall many heirs fall into is a quick sale to an investor, who brings cash. Often times these speculators will just turn around and sell it a month later for substantially more, with only a minimal investment of time an improvements  (if any at all) put into the home. Wouldn't you rather wait a month or two and get the same price the investor will surely get? In a few instances I've seen investors come in and do nothing but slap on some paint and shampoo the carpet and make double what they paid! Ridiculous! Personally, I would rather see that profit go to the family who has lost a loved one who worked hard to provide for their children upon their death.  My advice: seek out a trusted Realtor. In Placer County a home that is priced right and marketed correctly should have no problem selling within 3 months.

Once the property sells, you’ll need to pay any remaining mortgage balance along with any real estate commissions, transfer taxes and other closing costs. In Northern California your title company  will likely arrange all of these things thru the escrow process for you.

Moving Into Your Parent’s House

Some choose to move into their parents home themselves. If you are the sole heir this process is made much easier.  However, with multiple heirs it becomes more complicated as the others will likely either require some form of rental payment, and/or opt to be bought out of their shares of the home.

Moving in also gives the added bonus of being able to take your time sorting through parents’ belongings, a luxury not available to those who sell immediately. 

Keep in mind, moving in may mean an increase in property taxes for you. Not only will the house be worth more than before because of the stepped-up value, but any special property tax break for senior citizens may disappear. You’ll have to qualify on your own for such treatment.

Still, there’s an added advantage down the road if you later sell and the house has appreciated in value by then. For example: If the inherited property becomes your principal residence and you stay in it for over 2 years, you can eventually qualify for the capital gains exclusion.

That means if you sell, you can pocket the profit (up to $250,000 for single filers, $500,000 if you’re married and filing jointly) without owing capital gains taxes. 

Renting Out Your Parent’s House

Some find it difficult to decide to part ways with the family home for various reasons, making renting it a very viable option.  This allows the home to remain in the family, while also providing rental income to those who were left the home. Some even choose to turn the house into a vacation rental to generate income, so they can still use it for family celebrations on a limited basis.

To keep costs down, many elect to serve as their own property manager. Of course, this money-saving strategy only works if you live reasonably close to the property. If not, you’ll want to find a reputable property manager in the area, a necessity that can cost between 10 to 30% of the rent.

You’ll also need to change the insurance coverage to a landlord policy which covers the structure and personal property as well as medical and legal liability — in case a tenant gets hurt or sues you, and loss of rent, if the property becomes uninhabitable due to a covered loss.

Turning the home into a rental provides a big tax benefit, too. The depreciation expense will serve to reduce your taxable rental income.

For tax purposes, the house itself is considered a depreciable asset and a certain percentage of its value can be deducted annually. You can also depreciate improvements, like a new roof, provided they add value or will extend the property’s life.

The catch is you’ll have to pay back that depreciation to the Internal Revenue Service if you sell. That means you’ll owe more in capital gains, if there are any, and that you also won’t qualify for the capital gains exclusion since the house isn’t your principal residence.

If you have any questions feel free to call or text me. 

530.628.SOLD

Until next time,

Jennifer