You just inherited a house. Now what? This could be a sad time for you. Maybe a parent has passed away and you are left with a house that you have no idea what to do with.
- Do you still pay taxes?
- Can you rent it out?
- Will selling it be difficult or easy?
- Can you just move right in?
There are so many questions! Many mistakes can be made after inheriting a house and these can lead to many financial problems down the line.
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You need to keep in mind that you will still be taxed! In many years past, the estate tax has had a high exemption. What does this mean exactly? An estate tax is a tax levy on the net value of the estate of a deceased person before distribution to their heirs.
According to The Center on Budget and Policy Priorities, only the estates of the wealthiest 0.2 percent of Americans — roughly 2 out of every 1,000 people who die — owe any estate tax. This is because of the tax’s high exemption amount, which has jumped from $650,000 per person in 2001 to $5.45 million per person in 2016.
What You Will Need To Take Into Consideration
- You will need to take into consideration the price paid by the person from whom you are inheriting the house. For example, if your parents bought the house 20 years ago for $30,000, and you can sell the house today for $1,000,000, you’ll have to pay capital gains tax on the difference between the house’s value at the time you inherited it and the sale price.
- However, with a “step-up” provision, you only pay taxes on the amount in the gain – which would be $970,000. Whatever you decide to do, make sure you meet with a tax professional before you decide to stay or sell.
- You’ll also want to do some research on the mortgage. If you are inheriting a house from a relative that owned it for 60 years, you are probably getting a house that’s all paid off.
- However, the owners may have taken out a reverse mortgage on the house.What’s a reverse mortgage you may be wondering? A reverse mortgage is a financial agreement in which a homeowner relinquishes equity in their house in exchange for regular payments, typically to supplement retirement income. Unlike traditional mortgages, which decline as you pay down the loan, reverse mortgages rise over time as interest on the loan accrues.
- If you want to move into the house you inherited, you can assume the mortgage yourself and start working to pay it off. However, if you are not going to actually live in the house you inherited and are going to rent it out to tenants instead, the bank may require you to refinance in your own name.
- Here’s the kicker: If the house you inherited does still have a mortgage and you can afford to pay it off yourself, then do! If not, the house will have to be sold to pay back the bank.
Keeping Family Members Informed
As previously mentioned, this may be a very hard time for family members. Inheriting a house often means that a family member has passed away. Take the time to discuss plans with other relatives and do your best to keep everyone in the loop. Often times, family drama can arise from these situations. Maybe you want to live in it but your siblings want to sell it. That can be tough. It’s smart to keep in mind that there is also a lot of other “baggage” that can come from inheriting the house of a loved one.
It can also be emotionally difficult to move certain personal belongings that have sentimental value. Many people cannot bring themselves to clear out and sell houses that they have inherited. Then, the families stall for a year or two because they are sad, which could be very expensive! Not selling a house and not living in it makes for increased maintenance and insurance costs.
Hopefully, these tips and ideas come in handy should you ever find yourself with an inherited house on your hands.
For more resources, head to our blog at Gordon James Realty.
Disclaimer: This article is for informational purposes only, and does not constitute legal advice. Be sure to consult with a legal professional before taking any action.