What Do You Do With a House Left to You In a Will?
Inheriting a house is always going to be complicated. It’s part financial challenge and part emotional journey. Losing any loved one is always tough.
But now has come the time to decide what to do with the home. Before you can make any choices about the property, you do need to tend to a few problems first.
Responsibilities of getting a home in a will
Inheriting a house that is paid off, is a blessing. However, those who have inherited property will attest to the fact that more often there are a number of payments that need to be made. And it’s not that basic to take care of.
These can include:
As the original policyholder has passed away, the insurance policy on the property will need to be rewritten. This being said, most insurance companies will give those inheriting the property time to change over policies and coverage - and this period is usually 30 days.
If you are lucky, some agencies will allow the current policy to run its course until it expires, so long as you keep making the payments.
For those where the property goes into probate, this might leave your policy in limbo for a long time. As no one can lay ownership to the property in probate, this means changing names on the policy will be impossible as well.
Short-term insurance could be the solution while the home is in probate but may be rather pricey. However, this is especially needed if the home is vacant, and it’s important to maintain coverage until you can obtain a new policy.
Now that you’ve sorted up the insurance, let’s look at mortgages.
If you’ve inherited a house with no mortgage - well done! But unfortunately, this is unlikely.
The existing mortgage will be still in place and someone will need to pay the monthly payments. If you miss these payments, you risk the property falling into foreclosure.
This means you’d lose the property without any compensation. If you’re unsure at this moment whether the property has an outstanding mortgage, you will need to check the home’s title which will list the lender on it.
You could also apply for, or request, a credit report for the person who has passed away.
If the property is underwater — meaning that the debt due is higher than the house's value — then you can negotiate with the bank to perform a short sale. Short selling an inherited house means that the bank has agreed to accept less money than the full amount due on the loan.
If you’re inheriting a house from someone who had multiple assets of value under their name, then the sale of them might cover the cost of the mortgage.
It’s possible that the home had a reverse mortgage placed on it by the original owner. A reverse mortgage is usually used by retirees that want to leverage their home’s equity for a monthly income. In this case, whoever inherits the house then has a window of opportunity to pay off the balance in order to keep it. If you’ve taken on a home with a reverse mortgage, the repayment of the balance due is usually procured, either through selling the home or taking out a new loan under your name.
The property may have a mortgage with a due-on-sale clause. A due-on-sale clause is enacted when the original debtor transfers the property, making the mortgage due in its entirety. This is usually the case when it’s been transferred to a non-family member. If the property is transferred to a family member, then they may be eligible to take on the current mortgage installments. So, if you’re wondering, “can I inherit my parents’ house?” check with them to see if they have a due-on-sale clause with their mortgage.
While there might not be any mortgage on the property, you could have to pay taxes.
If a house is left to you in a will, you might not know who’s responsible for paying taxes.
In most cases, inheriting a house doesn’t automatically make you liable for the taxes on the home. However, this is dependent on the state that the property is in. There is no federal inheritance tax, so each state has drafted its own statutes regarding how inheritance taxes are structured.
Once you’ve inherited a home, a fair market value (FMV) is determined by the IRS, creating a step-up basis. A step-up basis is used when an asset is transferred through inheritance to establish its current value. When selling inherited property, the step-up in basis will be used to determine taxes.
The step-up basis helps alleviate some of the tax burdens of selling an inherited property. When selling a home for profit, you’re subjected to capital gains tax. The step-up basis helps in this situation, because if you sell your inherited house for a profit, you’re only subjected to tax on the profit above the new FMV.
For example, if you inherited a home that was originally purchased for $50,000, but after inheriting it, its FMV is established at $100,000, and it sold for $120,000, then you’re only taxed on the $20,000 profit above FMV.
It’s possible to be exempt entirely from capital gains tax if you fulfill certain prerequisites. But we’ll get into those details later when we talk about selling an inherited property.
If there are multiple members who have left the property in the will, you will need to address a few things before you start making plans.
If you come from a large family, the property may have multiple stakeholders. This can make things more complicated as people may have different levels of attachment to the property or be in various financial situations. This can lead to disputes, but there are options that may please everyone involved.
If you want to keep the property, but the others are looking to sell it, then you can choose to buy them out. You can finance the buyout through either personal funds or taking out a loan, but usually, the costs and fees involved will fall onto you. Essentially, buying from or selling inherited property to a family follows the same protocols as selling to anyone else.
However, if you want to hold on to the inherited property, but the other stakeholders want to sell it and you can’t obtain a mortgage, then you can get a promissory note. A promissory note is basically a legally binding I.O.U. in which you detail how you will pay the other stakeholders for their portion of the home in monthly installments plus interest.
If none of the parties involved want the home, the easiest solution is to sell the home and split the profits. If the property is suitable for renting, then you might also consider turning it into a rental property and splitting the profits at the end of each month.
In the unfortunate event that a decision can’t be reached, then you’ll need to take the matter to court. A lawsuit for partition will need to be filed, and a judge will usually order the home to be sold. In most cases, this is a lose-lose solution.
But once you’ve dealt with these problems you need to decide what to do with a house you’ve inherited.
What can you do with inherited property?
So, you’ve gone through the process of inheriting a house, you know the debt involved, all the stakeholders are in agreement, and the house seems to be in proper order after an inspection, now all you have to do is decide on what to do with it.
An easy option, if the bank grants you a mortgage, is to just move into the house.
If the house is an upgrade on your current living situation and the mortgage isn’t more than the home is worth, then you can keep the home in the family, allowing your kids to make memories just like you did.
Also, by moving in, you’re allowing yourself to be exempt entirely from capital gains tax if you fulfill certain prerequisites. The first prerequisite is that you must make the property your primary residence for a minimum of two years out of a five-year period. Second, you cannot have used the capital gains exclusion on another residence within two years before the sale.
If you meet these requirements, then you’re exempt from up to $250,000 of the profit if you’re filing your taxes as an individual, or $500,000 if you’re filing with a spouse.
Which is rather useful. For those not interested in moving into the property, you can rent it.
If you’re happy with your current living situation, or if you’re inheriting a house that you can’t afford to pay the mortgage for, but is still in good shape, then you might consider turning it into a rental property.
However, being a landlord isn’t always an easy job. While you can outsource a lot of the duties, you’re ultimately responsible for maintaining a house that someone else has turned into their home.
There are obligations and taxes that come along with the passive income you’re generating. One of the tax implications you need to consider when converting inherited property into a rental is that you are no longer eligible for capital gains exclusion. As a positive, the taxes on the rental income you will be subjected to come at lower rates than the standard income you've generated.
The last step is to answer the question, “I inherited a house and want to sell it?”
Sell your inherited house
If you’re not attached to the property and it’s not something you can afford to keep, selling an inherited house might be the way to go. This being said before you sell the property you might need to renovate parts of the home.
Unless you can find a cash buyer to purchase the home “as-is” like Easy Outs Homes does.
Why trust Easy Outs Homes to buy your home?
We value Integrity here at Easy Outs Homes. When you choose to sell your house in Harford County, Maryland and surrounding areas to us we make sure you will be provided with honest, transparent process. You can trust our references.
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How Easy Outs Homes works
We’ve ensured that every step is simple, quick, and efficient. That’s why our first step is you approaching us. Simply give us a call at 443-347-3556 or use our online form to get started!
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Once we’ve gathered your information, we will arrange a time for us to come by the house to finalize that important paperwork. And once you’ve signed on the dotted line, the money will be in your bank account in a matter of days.
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