Factors to Consider When Renting Your Inherited House

Written on Thursday March 7, 2019 by Bob Hinrichs

There are three common options for those who inherit a home – sell, keep, or rent. Each of these options come with their fair share of pros and cons, so it’s important to consider all of them before making any major decision! This article will cover three major factors to think about in regards to renting your inherited house.


Inheritance Tax

Lucky, you! When inheriting a home, there are a LOT of taxes that come into play. First up… the inheritance tax. This tax is typically due within nine months of your inheritance and can be a significant chunk of money depending on the total estate value. You’ll want to find out how much this inheritance tax is going to be for your given situation to see if you can afford it before moving forward. If you can’t, it’s possible you’ll either need to take out a loan or sell the home to pay the tax. It seems counterintuitive because it is, but sometimes it’s necessary.

Capital Gains Tax

The second tax to consider is capital gains tax. If you sell the home at any amount higher than the value determined on the day of the deceased’s death, you’ll be subject to capital gains tax. There is a way to limit your liability for this type of tax, but it would require you to live in the home for at least two of the five years directly prior to the sale of the home. If you do so, you’ll receive $250,000-$500,000 worth of exemptions (depending on if you’re single or married). The reason this becomes a factor for renting is because if you do rent the home, you will not be eligible for capital gains exemptions when you sell (unless you’ve lived in the home for two out of five years leading up to the sale).

Property Tax

The third tax to consider is property tax. Every estate has applicable property taxes; however, residing in the home personally could allow you to claim varying amounts of exemptions depending on where you live. For instance, in Florida and many other states, there is Homestead Exemption. What this means is if your home is your primary residence, you’ll be able to claim a certain amount of exemptions from your property tax. This would reduce your overall property tax liability and save you money.

Income Tax

Finally, don’t forget about income tax on the money you earn renting the house out. With all of these taxes, many wonder why renting would ever be a feasible option. Here’s why it can be beautiful. If your newly inherited home becomes an investment property (renting it out), you can claim a lot of expenses as tax write offs! These write offs could include mortgage interest, repairs, improvements, depreciation, and even property taxes! If you manage the property yourself, there won’t be a limit to what amount you can write off. However, if you hire a property management company, you can only write off the amount of expenses equivalent to your income from that property. So, you can’t use additional write offs on any other sources of income.

Added Time / Stress Involved in Property Management

You haven’t even rented the property yet and after four paragraphs, you can already see how much it’s going to require of your time and resources. As we just mentioned, you can hire a property management company to handle just about everything for you, but it will come at a cost. The typical management company takes between 8-25% of monthly rent as fees for their services. This is ideal for someone who is already very busy or doesn’t have a clue what they’re doing, but it’s not always feasible. It may be that you’re not making enough money after paying a property manager to make it worth continuing to rent the property.

It’s also important to consider a worst-case scenario. What happens if one tenant moves out and you can’t find a new renter for six months? Do you have enough money to keep up with all of the expenses in the interim? If not, it might not make sense to take the financial risk. Run through all of the costs we’ve mentioned before making any decisions.

The final potential stressor we want to mention has more to do with setting the property up for rental to begin with. As a landlord, it’s your legal obligation to ensure the living conditions are safe and habitable at all times for your tenant. You’ll have to have an inspection done and ensure everything is up to code before having anyone move in or you’re setting yourself up for trouble down the road.

Mortgage / Financial Complications

The last factor you’ll need to consider is whether or not there is still money owed on the property. If the deceased left behind a mortgage, you’ll need to speak to the lender to know your options before you can make any decisions. They may not allow you to assume the mortgage as is if you don’t plan on living there personally. That would mean you’d have to refinance the mortgage in your name, which may or may not be possible in your given situation. If you own a different home that you’re currently paying off, it may be tough for a lender to approve you for an additional mortgage.

Mortgages, along with all of the other expenses we’ve mentioned today, will likely be the most limiting factor in whether or not you’ll be able to rent your inherited property. As we’ve said, it’s extremely important to walk through all of these finances before making a decision. In fact, we highly recommend sitting down with a Certified Public Accountant to limit any potential emotional biases.

We are fully aware of how confusing this situation can be for some. You’ve just inherited the most important possession from someone you likely cared deeply about. That itself can come with a lot of baggage. For many beneficiaries, renting their inherited home allows them to keep something they’re emotionally attached to without having to uproot their family and sell their other home. It also allows for them to hold onto the house, earn income, and sell later when the value has increased a bit more or when they are less emotional about letting it go. The choice to rent can be very strategic, but be sure you’re making a clear, unbiased decision that considers all of the factors discussed above.

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