The considerations in handling a house inheritance include taxes, financial issues like a mortgage and relationship concerns.
When a house is transferred via inheritance, the value of the house is stepped up to its fair market value at the time it was transferred, according to the Internal Revenue Service. This means that a home purchased many years ago is valued at current market value for capital gains.
Inheriting a house doesn’t usually trigger any tax liabilities by itself. There is no federal inheritance tax, although larger estates may have to pay federal estate taxes. Six states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. In all of these states, a spouse is exempt from paying inheritance tax. (Source)
Capital gains are a special type of tax relating to the profit generated by an asset, such as a house. The step up in basis means you’re only subject to capital gains taxes if you sell the home. You’ll pay taxes on the difference between the established fair market value at the time of inheritance and the selling price. If your parents originally bought the home in the ’80s for $30,000, but its FMV is $400,000, your new tax basis is $400,000. If you sell the property for $400,000 shortly after inheriting it, you wouldn’t be subject to any capital gains taxes because there’s no profit. However, if you sell the property for $425,000, you’d pay capital gains tax on the $25,000 profit. ( Source )
Inheriting a home can be a blessing or a burden, depending on several factors:
- The existing debt obligations, such as a mortgage
- The current condition of the property
- The costs of ongoing maintenance and upkeep
- If there are multiple heirs
One option when inheriting a home is making it your primary residence. If you want to move into a house with an outstanding mortgage, determine whether the debt obligation on the home makes financial sense.
The current condition if the property is the heirs responsibilities, they are responsible for paying taxes, insuring the property, and maintaining it on an ongoing basis. For some, these responsibilities are too large of a burden — in this case, it may be easier to sell the home as-is.
It’s fairly common for multiple siblings or family members to share ownership of an inherited house. For some families, this isn’t an issue. For others, having multiple heirs complicates things because each person has different needs and opinions.
Inheriting a home can be a blessing, but also a responsibility.
If you are fortunate enough to inherit property, take the time to understand your options from both the financial and the emotional perspectives. Inheriting property can mean inheriting debt, which in turn can impact your relationship with credit.
Questions to ask yourself:
Do you and your siblings agree on how to proceed? And if not, how do you resolve these issues? Can I assume the financial responsibilities of an inherited home and still maintain good credit habits?
As overwhelming as it may feel when you inherit a property, understanding what happens when you inherit a house is a big step in the right direction. Take the process step by step and speak with a licensed accountant or attorney about your options to determine how the inheritance will affect you or your family.
In the end, you may decide to honor the memory of the person who passed by maintaining their beloved home or by finding a new family to fill it with love.
The richest in the world have made their fortunes in many ways, but there is one common thread for many of them: They made real estate a core part of their investment strategy. Of all the ways the ultra-rich made their fortunes, real estate outpaced every other method 3 to 1. (SOURCE)