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When you inherit a house, you receive more than property or financial gain. Inheriting a home also brings on increased legal and financial responsibilities. It may require negotiation with siblings or other heirs, and could cause an emotional reckoning as well.
The first thing to do when you inherit a house is create a short-term plan to maintain the home while the estate settles. You'll need to provide for upkeep, think through your long-term goals and discuss your ideas with any siblings or other heirs who share a stake in the property. Let's walk through some of the issues that may arise when you inherit a house.
What Are the Financial and Legal Responsibilities of Inheriting a Home?
In the immediate term, you'll need to plan for the ongoing expenses of maintaining the home. That means continuing to pay the mortgage, utilities, property taxes, homeowners insurance and any urgent repairs or maintenance the home might need. Here are a few of the major considerations to take into account.
Once the owner of the home passes away, the insurance policy on the property technically should be rewritten. Most insurance companies will allow some time for you to find your own coverage—30 days is typical—and some will let the current policy remain intact until it expires, as long as you stay up-to-date on payments. Be aware, though, that if the house goes into probate, it may be in insurance limbo for a significant period of time. You can't assume ownership of the house while the property is in probate, so you won't be able to get insurance in your name during that time. To make sure the house is covered, you or the executor of the estate should contact the current insurance company and ask them what your coverage options are. Short-term insurance while the home is in probate may be pricey, especially if the home is vacant, but it's important to maintain coverage until you can obtain a new policy in your name.
You must continue making payments on any existing mortgage or you run the risk of foreclosure—which would mean losing the property without any compensation. If you don't know whether there's an outstanding mortgage, or who might hold it, you can check the home's title, which should list the lender. Or you may want to request a credit report for the person who passed away. A credit report will show any outstanding loans, including mortgages.
Other Outstanding Debts
Running a title check on the property may also reveal liens and other outstanding debts secured by the home—for example, unpaid contractor bills or second mortgages. These debts typically follow the property, so when you become the owner of the house, you will likely own these debts too.
What Can You Do With a House You Inherit?
How do you decide what to do with a home you inherit? This decision is profoundly personal. There are three main options to weigh, each with their own pros and cons.
Making your inherited home your primary residence can be a great choice—if you can afford it. Before making this decision, think through mortgage costs and the costs beyond the mortgage, including property taxes, needed repairs, insurance, upkeep and so on. If you inherited the home with siblings or other heirs, you may need to buy them out of their shares, which could mean an even larger mortgage going forward.
On the upside, federal rules require mortgage lenders to work with you if a relative has passed away and you've inherited the house. You may be able to simply add your name and assume the mortgage, possibly even without a check on your ability to repay. If you continue to pay the existing mortgage without legally adding your name as the borrower—or you haven't had time yet to complete this process—your credit will not be impacted, positively or negatively, since your name is not on the loan.
Then again, you may decide it's better to either pay off the existing mortgage or refinance in your own name. If you have good credit, can secure a better interest rate or prefer different loan terms (spreading the remaining loan balance out over 30 years, for example), refinancing may be a better option once the transfer of ownership is complete.
You may also need to pay off or refinance the loan if the home has a reverse mortgage. With a reverse mortgage, the borrower pulls cash out of the home's equity, either in a lump sum or as regular payments. The lender is paid when the property sells or transfers ownership. If your inherited home has a reverse mortgage and you don't wish to sell it, you will need to make arrangements to pay off the lender.
Rent It Out
If it's not in the cards for you to live in your inherited home full time, you can consider renting it out. Finding long-term tenants is an option; so is turning the property into a vacation rental. You may need to spend some money to convert the residence into a marketable rental, but it could end up being a nice source of passive income. On the other hand, being a landlord is a lot of work—and it can be even more complicated if you're planning to co-own the property with your siblings or other heirs. Also be aware that renting the home changes your tax implications, so consult with a tax advisor for details.
Sometimes it's not practical to keep a house, either because you can't afford the mortgage and maintenance, or you don't want the ongoing complication of renting it out or co-owning it with others. Selling gives you a clean break. If you decide to sell the property, create a plan to cover expenses while the house is being prepared and is on the market. You may also wish to budget money to fix up the property to get the most you can for it.
Do You Pay Taxes on a House You Inherited?
If you decide to sell the house, you may be subject to taxes. Here's a quick rundown of potential tax liability to consider:
Estate Taxes: In 2021, federal estate taxes may apply if the estate's combined gross assets and prior taxable gifts exceed $11.7 million. Additionally, AARP reports that 17 states and the District of Columbia have estate or inheritance taxes. Check with your state tax collector for more information.
Capital Gains Taxes: If you decide to sell the home, your profits may be subject to a capital gains tax. The good news is you won't pay taxes based on what was originally paid for the house. The fair market value of a home resets upon the owner's death. So, if your parents bought their home for $50,000 and it's worth $500,000 now, the tax basis of your inherited home is $500,000. If you sell the house for $500,000, you won't have any taxable gains. If you sell it for $550,000, you'll pay capital gains taxes on $50,000.
If you decide to live in the house or rent it out, you'll pay property taxes on it, just as your relative did when they owned it. It may be part of the mortgage payment or separate from it. Depending on where you live, property taxes can be quite expensive; so as you decide how you will handle the inheritance, keep that cost in mind.
Prepare Your Family for the Future With Estate Planning
Inheriting a house is complex. In addition to the practical issues outlined above, there may be emotional considerations as well. Are you prepared to part with your childhood home—or live in it? Do you and your siblings agree on how to proceed? And if not, how do you resolve these issues?
Another complication is probate. Probate is a lengthy—and costly—court process that determines how an estate is distributed after a person's death. Probate can drag out over many months and often requires legal help. Proactive estate planning, including the creation of a living trust, can help you and your family avoid probate. This is an important step to discuss with your parents or relatives, especially if you're in line to inherit their property. It's also something you may wish to undertake yourself to make inheritance simpler for your heirs.
Making a Sound Decision
Inheriting a home can be a blessing, but also a responsibility. If you are fortunate enough to inherit property, take the time to understand your options from both the financial and the emotional perspectives. Inheriting property can mean inheriting debt, which in turn can impact your relationship with credit. Can you assume the financial responsibilities of an inherited home and still maintain good credit habits? In the end, you may decide to honor the memory of the person who passed by maintaining their beloved home—or by finding a new family to fill it with love.