Factors to Consider when Inheriting a Home

Written on Saturday June 9, 2018 by Bob Hinrichs

Factors to consider inheriting house

Inheriting a home can seem like winning the lottery. After all, you just received a free house… right? Well, just like winning the lottery, inheriting a house can either be devastating or amazing. It all depends on the circumstances and the decisions you make. There are five important factors to consider when you inherit a home. These factors can act as your unbiased guide to help you decide what you should do with your newly acquired asset to avoid any emotional or financial trouble.

Factor #1: Taxes

That house you thought was “free” is not actually free at all. There are multiple taxes applicable in an inheritance situation that you need to keep in mind before moving forward:

  • Inheritance taxes can range from 18-40% depending on the value of the estate. These are often due within nine months of the inheritance.
  • If you keep the home, you’ll also owe property taxes for the duration in which it remains in your possession. These are often 0-4% of the overall value of the property depending on the state and specific situation. States like New Jersey and Illinois are known for having some of the highest property taxes overall while Alabama is known for having some of the lowest.
  • If you decide to sell the property, you may be required to pay capital gains tax on any amount above the value of the home the day the previous owner passed. Depending on the amount of time you own the home before sale, these taxes could range from 0-40% of the “gain” upon sale of the home. A gain is the amount left when you subtract the sale price from the value determined on the day of your loved one’s death.

There are ways to avoid some of these taxes such as living in the home for two years before selling to take advantage of capital gains exemptions. It’s helpful to consult a Certified Public Accountant prior to making any big decisions. However, it’s really important to realize that this seemingly free home does actually come with some hefty taxes. If you cannot afford to pay them (such as the inheritance tax), you may need to sell the home just to cover these costs.

Factor #2: Mortgages

In a perfect world, the home would have been completely paid off prior to you inheriting it. Unfortunately, we don’t live in a perfect world and no one knows when they’re going to die. Because of this, it’s not uncommon for there to be mortgages still attached to the property you inherit. This obviously creates sort of a sticky situation for you, so here’s what you need to find out:

  • Is the lender going to trigger an immediate payback of the loan? In some cases, this is completely legal and is within the terms of the mortgage. If you don’t have the cash to pay it off completely in this case, you may need to sell the home just to pay back the bank.
  • If you don’t have to pay the outstanding amount back immediately, will the lender allow you to assume the current mortgage and continue making payments? Many lenders won’t allow this if you’re not living in the home.
  • If that’s the case, will they allow you to refinance the mortgage in your name? And do you want to / have the ability to cover the payment each month? It’s possible you own another home and can’t afford to take on a mortgage for two properties.

Knowing your exact options and situation are extremely important in helping you determine the best way to proceed with the property. Though you may have a sentimental attachment, it may not be realistic for you to keep the home from a financial standpoint. If you are hell-bent on keeping the property, you may have to sell your current home. All of these possibilities should be weighed with an accountant or realtor to help you figure out (unbiasedly) where you’re going to get the best value.

Factor #3: Maintenance Costs

Does this estate include multiple acres of land? If so, can you afford landscaping and upkeep? Can you afford to keep the home temperature controlled to avoid pipes from freezing or mold from growing? All of these questions need to be considered. The last situation you want to encounter is receiving fines because you’re not maintaining the property to code.

If you’re not going to live in the home, does it make sense to rent it? Speak to a professional to determine the best decision for your situation.

Factor #4: Current Condition

One of the first moves you should make upon inheriting an estate is having a thorough inspection done. At the very least, it will help you make an informed decision as to what to do with the property. It can help you determine if it’s safe to rent out or live in personally.

If it’s not in habitable condition, it may make sense to sell it to a cash investor who could flip it. Doing so would allow you to move on with money in hand, avoiding guaranteed headaches down the road. (If you’re in this kind of situation, consider reaching out to us via the information bar on the side of this page. We invest in homes and pay cash, so we may be able to help you out of your situation.)

Factor #5: Co-Inheritors

It’s possible you’ve inherited this home with 100% ownership. In that case, you don’t need to worry about this final factor; however, it’s pretty common that a parent will leave the family estate to all of their children to split equally. While this seems like the fairest option at the time, it complicates things.

While one sibling might want to keep the home to share, one might want to rent it out and another may want to sell the home and split the profit so everyone can move on as equally as possible. Before making any decisions about what to do with the home, get together with your co-inheritors to assess factors 1-4. Then speak to professionals to make the best decision for everyone. If it seems you can’t all get on the same page, there are options for buying one another out. These kinds of things can be determined with the help of accountants, lawyers, and therapists.

Either way, when you inherit a home, go through this list and do your best not to allow sentimentality to become a factor. While emotions are valid and important, they cannot solely determine the feasibility of keeping an inherited estate.

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