With the executing of a loved one’s will, you found out he or she left a home to you. Maybe you had expected to inherit a home or maybe that news surprised you.
Regardless of any previous knowledge, if the person’s death came unexpectedly, you may not have prepared for this responsibility. If you already own a primary residence, you may not know what to do with this new property.
You’ve certainly heard horror stories of contested wills or enormous taxes levied on inherited properties. So, you’re left wondering…now what?
The first question you’ll need to address is this:
Are others named as owners in the will?
If the estate attorney sent you notification of having inherited property, consider yourself lucky. It means your loved one had a will and wanted you to receive this possession. If the individual also wanted others to receive partial ownership, you may find yourself sharing joint ownership of the house.
Depending on the nature of your family dynamics, especially without clear instructions from the departed, prepare for a bumpy ride.
- What kind of relationship do you have with those individuals?
- Does one person want to inhabit the house?
- Does another want to just sell it outright?
- Do you have that one contrarian family member who only wants to make the others miserable regardless of the outcome?
Pro Tip: Even with a “whatever you wanna do, I’m fine with it” person in the mix, get everything in writing! Feelings change. Secure an estate attorney ASAP and have those tough conversations as soon as practical.
Okay, next important question:
Are you inheriting a house with a mortgage?
If the property has a mortgage or other liens, it could drive how quickly to make a decision to keep or sell the property. The decision will affect whether you may also pay property taxes, inheritance taxes, or capital gains on the property.
Some mortgages may require inheritors to fully pay off remaining balances in short order or take a loss. For example:
- Underwater properties (more owed on property than its worth): Banks may allow for short sales and accept less money than is owed to satisfy the debt
- Due-on-sale clause (most likely when a non-family member inherits house): This clause may require the full amount of loan paid at time of property ownership transfer. However, family members, in most cases, can assume mortgage payments instead.
- Reverse mortgages (owners receive payments from the lender based on home equity): This option may require repayment of the loan in full plus any accrued fees and interest until paid off. Reverse mortgages can create immense headaches for heirs, even when they secure independent financing to purchase from the current lender.
Regardless, the executor of the will should continue to make payments on the existing mortgage. You’ll want to avoid late fees or potential default that could start a foreclosure process.
You should always consult with a certified public accountant (CPA) and an experienced estate attorney on tax questions.
- Estate taxes: Usually, inheritors won’t have to pay estate taxes on the market value of an inherited property.
- Property taxes: Beneficiaries will have to pay any property taxes like a regular owner.
- Income taxes: In general, beneficiaries don’t need to pay income taxes on inherited property, even if they decide to sell it outright.
Capital gains taxes: If a property sells within a year of the owner’s death, inheritors may not owe any capital gains taxes.
What condition is the house in?
Even if you’ve been named sole owner, it makes sense to get inspections and comps to determine its worth. If Gramma didn’t do much maintenance or make updates recently, you may have a lot of work on your hands.
Better to know what you’re dealing with before making a final decision.
Have a thorough inspection done to see what may need repairing and what updates could be done to increase value. Whether you plan to stay or rent out the home, the house must pass certain codes. Then map out which upgrades will maximize return on investment depending on different renting and selling scenarios.
Ask a realtor to pull comps on the house in the current condition and with repairs. If one member of a joint ownership wants to be bought out, you’ll know a fair price to offer. An estate attorney may recommend documentation on several options especially after several – er, interesting – family conversations.
Expect feelings to continue to change as worth, condition, repair reports roll in. As much as possible, remove any emotional attachments to the outcome. Above all else, call on your better angels when dealing with anybody’s anger and frustration.
What if I inherited a house and want to sell it?
If no one wants to live in the house and outstanding liens don’t necessitate immediate selling, you have some choices.
For years, people have used the Napkin Test to break down house value and costs. The napkin test accounts for outstanding mortgages and closing costs vs. annual profit from estimated rent collection. This way you can decide if selling outright makes better sense than using the house as a long-term investment.
Again, this is only a preliminary napkin or back-of-the-envelope exercise. You should most certainly consult with a real estate attorney and a real estate investment professional to confirm your figures.
Do I need a property manager’s help?
If you decide to hold onto the house as an investment property to rent out, determine who will take action steps. Often when someone inherits a house, they already have a full life with little room for being a landlord, too.
Initially, some may consider doing everything themselves anyway, but things can get complicated quickly and eat up tons of time.
- Do you know which repairs or upgrades you need to make to adhere to rental home codes?
- Do you know which codes apply to the house?
- How much can you charge for rent?
Having the assistance of a trusted property management company can help save you time and energy.