What Are Your Options When You Inherit Property?

An inheritance can come with emotional and financial baggage. When you inherit property there are many things you will need to consider—what you want to do with the property, how the property fits into your financial picture, and the best way to honor and continue your loved one’s legacy all of which can be really overwhelming. 

Our team is here to help you sort through your options and take some of the load off your shoulders. In general, there are three things you can do when you inherit a house: move in, rent, or sell. Today, we are going to dive into each of these to give you a better sense of what they look like in practice. 

Should you move in?

When you inherit property, the first thing that comes to mind might be to move into the house. But before you make this choice, be sure you understand all of the financial and legal consequences. 

The first thing you’ll need to sort through is the mortgage. Does the house have an open mortgage and what type of mortgage is it? Most lenders allow the heirs to assume monthly payments but others stipulate the mortgage debt must be paid in full much sooner. Let’s take a look at some common examples:

• Reverse mortgage
  • This is a financial product that allowed homeowners to access their home’s equity. But upon the owners’ death, the full balance of the mortgage is typically due within 6 months. This might limit your options to selling the property so you can settle the debt.
• Due on sale clause
  • This clause stipulates that the entire balance of the mortgage is due when the property is transferred to someone else. It becomes especially important for non-family member beneficiaries as most family members would be able to assume regular mortgage payments. 
• Mortgage paid by the estate
  • Sometimes the mortgage debt is settled and paid by the estate which makes your path much clearer. 

Let’s say you can assume the mortgage, the next question is can you afford it? You have to make sure that the home is suitable for your financial situation. Even if the mortgage payment is manageable, there are numerous other costs that come with home ownership like property taxes, insurance, ongoing maintenance, and more. You’ll also need to take a look at the general state of the house. Is it liveable or are there substantial repairs needed before you could reasonably move in?

You should also consider the change that a move would have on your lifestyle. Is the house in a different school district? Will you still be close to friends, family, and community members? A move could mean uprooting yours and your family’s lives. 

The next hurdle you will have to face is if you inherit the property with other people. This most often happens in the case of siblings. Multiple beneficiaries can cause strain especially if you all have different ideas of how the property should be used. There are a few options you can consider:

• Buy out their portion of the property
  • If you do this, it is wise to set up a promissory note which outlines the steps you will take to pay back their share of the property. 
• Sell the property and split the profits
• Rent the property and split the profits

In order to decide what is best, it is important that you have open, honest conversations with your family both about what you think is best and about what they think is best. By actively listening to each other, you will be able to come up with a compromise that works best for all of you. 

Your options for renting

Renting the house is often a useful strategy but one that needs to be done with careful consideration. Being a landlord comes with many responsibilities and you want to make sure that you are able to make the most of it. 

By renting the property, you will still assume the mortgage and other basic financial responsibilities like insurance and taxes. But the key thing here will be to analyze the property’s rental potential. Ask yourself the following questions.

• Is it in a desirable area?
  • School district, near entertainment, restaurants, access to public transportation, walkable, etc. 
• How much could you reasonably charge for rent?
• How long will it take to be profitable?
• Do you have the financial means to take care of the property in a rental lull?
• How much work will you need to put in to update it?

In addition to the financial considerations above, you’ll also need to think about your duties as a landlord. You will have to be available for maintenance repairs and also try to find a reliable tenant who will pay you on time and maintain the condition of the property.

Selling the property

The last, and perhaps simplest, solution when inheriting property is to sell it. Selling a family house can feel like a big deal, especially if the property has been in the family for generations. Remember, it isn’t the house that carries the legacy rather it’s the spirit, hope, and action that lives on each and every day.

While the financial costs of selling the house might be less than moving in or renting, you will still have some to consider like settling up the mortgage, real estate fees, staging, and costs for improvements. 

Under normal circumstances, capital gains tax is the difference between the original price of an item and the price that the item sold for. However, when you inherit a home, you can take advantage of a step-up tax basis. Under this rule, you are able to inherit the property at its current fair market value and you’ll only be taxed on any gains from the time of inheritance to the point of sale. 

How a financial advisor can help

Managing your inheritance is a big job, especially when property is in the mix. There are so many financial and legal considerations that your advisor team can help you navigate through.

No matter what you decide to do with your inheritance, our team at Legacy Wealth will be here to help you use it in a meaningful, fulfilling, and intentional way. Ready to see how our team can help you? Schedule a 15-minute call with us today.