When an Inherited Home Becomes a Drain on Your Finances

With a windfall comes many responsibilities, so if you inherit property, you should be ready for some surprises. If your parents leave you real estate, it can be a blessing, a burden, or a little bit. It can be hard to figure out what to do with the property, so it is best to think through your options carefully.

When you get a piece of property as a gift, you can move in, sell it, or rent it out. Your choice will depend on where you live now, if you have siblings, how much money you have, whether or not the house has a mortgage or liens, and how it looks.

Here are some things to think about:

Taxes

Most of the time, you don’t have to pay taxes on property you inherit, but you do have to pay capital gains tax if you sell it. The good news is that the basis of the property given as a gift or inheritance goes up. This means inheriting bought years ago for $150,000 and now worth $350,000, you will get a step up from the original cost basis from $150,000 to $350,000. You should have the house appraised as soon as possible to determine how much it is worth. You shouldn’t have to pay capital gains taxes if you sell the property immediately. If you keep the property and sell it in a few years for $400,000, you will have to pay a capital gains tax on $50,000. (the difference between the sale value and the stepped-up basis). On the other hand, if you use the property as your main home for at least two years and then sell it, you may be able to keep up to $250,000 ($500,000 for a couple) of capital gains off your taxes.

Mortgage

Is there a mortgage on the house, either a traditional mortgage or a reverse mortgage? In some estate plans, it is written that the estate will pay off the mortgage. If it doesn’t, you’ll likely have to take care of the monthly payments if you have a regular mortgage. On the other hand, some mortgages require the heirs to pay off the loan immediately. Most of the time, you only have a certain amount of time to pay off a reverse mortgage in full. When real estate with a mortgage changes hands, there is usually a “due-on-sale” clause in the contract that created the mortgage and a notice that says all of the mortgaged money is immediately due and owing to the lender. Still, people who get real estate after the owner dies don’t have to worry about this kind of clause because Federal Law preempts the lender’s contractual right to call a mortgage when the person who gets the property is either a relative of the decedent-borrower or was a joint tenant on the property’s deed with the decedent-borrower before they died.

Repairs

It’s a good idea to hire a home inspector to find out how the house is doing. If the property needs a lot of maintence and repairs, what you do with it may change. Renovations and repairs can cost a lot of money and take a lot of time. Before you start any big projects, you might want to talk to a realtor. Spending too much money on the house might not be a good idea.

Upkeep of the Property

Once you get the property, it will be your job to take care of it. If you get a piece of property as a gift, you should first make sure that the utilities and homeowner’s insurance are transferred to you and continue to be paid on time. You will also have to pay the property taxes and any other fees that go along with it. Consider asking for a fast cash house offer from businesses that purchase homes instantly.

Insurance

When you inherit real estate, you cannot keep the old homeowner’s insurance policy after the decedent has died. A Federal Law lets certain people who inherit real estate keep the deceased person’s mortgage, but there is no such law for the deceased person’s homeowner’s insurance. Still, a standard homeowners insurance policy does provide insurance benefits to the legal representative (i.e., executor or administrator) of the decedent-insured during the time between the insured’s death and the money going to the ultimate beneficiary (i.e., while an executor or administrator is probating or administering the estate). But this extension of limited coverage may be limited by other policy exclusions, such as the loss of coverage if the property is empty for 60 days before death or some other period set in the policy. Make sure to read the homeowner’s policy, which named the deceased as the insured, so you know how it works and doesn’t make any assumptions.

Rental

When a home loan, not a reverse mortgage, is on a piece of property, you may be able to rent it out without first switching the mortgage from a home loan to an investment loan. Concerning the due-on-sale clause discussed here in mortgage transfers, a person who receives real property and qualifies for due-on-sale preemption can also rent the property for up to 3 years, during any rental term, without the mortgage money becoming due and owing to the lender. This is allowed by Federal Law as a separate exception to the due-on-sale clause. Without this Federal Law preemption, a person with a mortgage on their primary home would be unable to rent it out unless they first changed their mortgage to an investment loan. So, people who inherit real estate can use it as a source of income instead of selling it right away or moving in themselves. Still, before renting out the property you inherited, follow the local law where the property is located by getting any necessary rental permits and avoiding illegal transient (short-term) rentals. If you don’t, you could get a ticket, have to pay a fine, or even go to jail.

Different Owners

If you and your siblings inherited the property, you all need to agree on what to do with it. If one sibling wants the property, the other siblings can sell it. If not, you can sell or rent the property and divide the money you get from it. Maybe you can get a fast cash house offer. If there is a fight between siblings, you can get a mediator to help. In mediation, the people who disagree hire a neutral third party to help them develop a legally binding agreement that everyone can live with. The people in disagreement can run the process and have a chance to say what they think and how they feel. If you have to go to court, the judge will probably tell you to sell the house so you can split the money. If you are in agreement to accepting a fast cash house offer, you can split the profit as well.

When you inherit the land, you have to make many decisions, and deciding what to do with it can be very emotional. If you can help it, avoid making any decisions until you’ve had time to think about them.

If you need help deciding what to do with your inherited property, contact Houston Capital Homebuyers for more information and see if a fast cash house offer is right for you!