Inheriting a house — while a generous gift from a loved one — kicks off a process that can be fraught with emotion. You’re likely receiving this property as a result of a loved one’s death, and the financial decisions that come with inheriting property can be stressful and confusing.
The best way to move forward is knowing your options, assessing the financial consequences of your choice, and seeking expert assistance in navigating the tax and legal requirements.
Here we seek to help you better understand all of this including what’s next, and five situations you may encounter when inheriting real estate.
Tax implications: Do I have to pay tax on an inherited property?
Once you learn that you’ve inherited a home, you’re likely wondering: Do I have to pay an inheritance tax on property? The act of inheriting a property doesn’t trigger any automatic tax liability, but what you decide to do with the house — move in, rent it or sell it — will cause you to incur property taxes, capital gains taxes or other expenses (more on that below).
What are capital gains taxes?
Capital gains taxes are taxes you pay to the federal government based on profits you earn from the sale of an investment. For example, capital gains taxes are paid on the difference between what you originally purchased a property for and what you sell it for (typically you won’t pay capital gains taxes on the sale of your primary residence, as long as you’ve lived in it for two of the last five years – learn more about Avoiding Capital Gains Tax on the Sale of Your Home).
If you do have to pay capital gains taxes, your rate is based on your taxable income. In most cases, when you inherit a home, you’ll be protected from the majority of capital gains taxes because of what is called the step-up tax basis.
What are step-up taxes or the step-up tax basis?
As the recipient of an inherited property, you’ll benefit from a step-up tax basis, meaning you’ll inherit the home at the fair market value on the date of inheritance, and you’ll only be taxed on any gains between the time you inherit the home and when you sell it.
For example, let’s say the house you just inherited from your mother was originally purchased in 1990 for $225,000. If the house is now valued at $425,000, does that mean that when you sell the home, you’ll be taxed on a $200,000 profit? Luckily, no. You’ll only be taxed on gains during the short time period between inheritance and sale.
I just inherited a property. What’s next?
Wait for the estate to go through probate.
The estate must go through probate before you may sell the property.
Most states have a summary probate process, but this is available only to small estates ranging in value from a few thousand to a few hundred thousand dollars.
In Ohio, you can take advantage of a simplified probate procedure, often called a “summary probate.”
Most estates that include real estate and other assets will exceed this threshold.
Determine who holds the legal responsibility to handle the transaction.
If the property owner left a Will, the executor is the person who has the responsibility and ability to distribute the assets of the estate, including real estate.
If the property is in a Trust, the trustee holds this same power.
In situations where siblings have inherited property together from their parents, one person often has the ultimate authority and responsibility to handle the real estate transaction, the Administrator.
Decide what to do with the property.
What you decide to do with your inherited property has to do with the financial status and physical condition of the property, where the home is located, along with any time constraints. It’s also a good idea to order a title report to determine if their are any liens on the property.
Is there a mortgage on the property?
If there is a mortgage on the home you’ve inherited, the details of the mortgage might affect how quickly you decide to sell or rent the property.
- Due-on-sale clause: Federal law states the mortgage must remain in effect when it passes from one person to another because of death. This negates any due-on-sale clause, meaning banks cannot demand the full payment of the loan’s outstanding balance before transferring the property. So, you can take over the mortgage and assume the current monthly payments, or you can refinance the mortgage..
- Reverse mortgage: In a reverse mortgage, which is a financial product popular with older homeowners looking to access their home’s equity without moving, the original owner receives ongoing cash for the equity in the home, repaying the loan upon moving out. Upon the original owner’s death, the beneficiary often has a limited time to repay the amount due — usually six months. You’ll need to pay the balance with your own funds, sell the home to satisfy the loan, or get a new loan in your name to cover the amount due.
- Underwater properties: If the property you’re inheriting is underwater (meaning more is owed on it than it’s worth), the issuing bank may agree to let you do a short sale on the home, accepting less for the property than the remaining loan amount.
- Mortgage paid off by the estate: While the person leaving the home to you may have had a mortgage on the property while they were living, it’s possible that the mortgage was paid off by their estate, and you own the home free and clear.
Does the property need repairs?
If the home was occupied by an elderly loved one who was unable to keep up with regular home maintenance adequately, the property you’ve inherited could have both visible and hidden problems that will almost certainly arise during a home inspection.
These issues, depending on their severity, can cost you thousands of dollars – or even the sale.
In cases like this, it’s not uncommon for a decedent’s real estate to be sold as-is to avoid the hassle of restoring the property and preparing it for market, with the proceeds being used to pay off the mortgage. Preparing such a home for market could take months or years while mortgage payments and taxes continue to accrue and accumulate.
- Repairs to sell: Just like any home you’d purchase for yourself, it’s always a smart idea to get a home inspection upon inheriting a home. You’ll want to know about any big-ticket repairs that need to be done before selling the home — think furnace, foundation, roof and windows. Home inspections cost between $250-$700, depending on the size of the home.
- Repairs to rent: Renters care less about the long-term condition of a property and more about the creature comforts, like new carpet and fresh paint.
- An alternative: Today’s buyers want homes that are turn key and move-in ready. They will want repairs completed before purchase. If you’re interested in selling the home quickly and as-is (without doing any repairs), consider our Columbus Ohio Trade-In Program. If you’re interested in getting top dollar and are willing and able to wait to sell, you might consider partnering with Improvio, a local company that provides high-impact, turnkey repairs and renovations and defers payment until the home is sold.
Are there multiple stakeholders in the inherited property?
It’s very common to inherit a property with another stakeholder, like a sibling or other family members. Of course, multiple stakeholders make things more complicated.
Consider these options:
- Sell and split the profits: Perhaps the most straightforward option, you and your sibling agree to sell the home, pocketing your half of the proceeds after expenses and commissions.
- Rent and split the profits: If the real estate market isn’t strong, you may decide it makes more financial sense to rent the property. You and your sibling would pocket whatever profit is left over from the monthly rent, after maintenance and property management costs.
- Buyout: If one sibling wants to keep the home and the other wants to sell, one can buy the other out, either in cash or by financing half of the home’s value. Out-of-pocket expenses include closing costs and an appraisal.
- Promissory note: If you want to keep the property, your sibling wants to sell and you don’t have access to a mortgage, you can record a promissory note that outlines how you’ll pay your half of the home’s value back to your sibling — in monthly installments plus interest. You’ll effectively be buying out your sibling over time, and they’ll receive some interest income along the way.
- Suit for partition: If stakeholders can’t agree on what to do with a property, you’ll have to get the courts involved by filing a lawsuit for partition, which essentially asks a judge to order the sale of the home. This can be a timely and expensive process, with legal fees lowering the profits you’ll receive far below what you would have pocketed by selling in the first place.
3 options for an inherited property: Move in, rent or sell
After gathering the necessary financial information, assessing the physical state of the home and communicating with any other stakeholders, it’s time to decide on what to do with the home you’ve inherited. Your decision to move in, rent or sell the property will depend on many financial, circumstantial and market decisions.
- Financial impact: Whether you have a mortgage payment or not, you’ll be on the hook for maintenance, HOA fees and the other unexpected expenses that come with homeownership.
- Tax liability: Just the act of inheriting a home doesn’t make you responsible for additional taxes in most states, except for the yearly property taxes you’ll pay as the new owner. Living in the home for two years (in the 5 prior to selling) qualifies a homeowner for capital gains tax relief allowing you to avoid taxes on any gains below $250K ($500K, if married filing jointly).
Turn it into a rental
- Financial impact: Being a landlord is tough. Being a long-distance landlord is a commitment few people wish to make. First, you’ll need to get the home rental-ready. Then factor in costs like 24/7 maintenance support, Columbus, Ohio property management and tenant gaps.
- Tax liability: Just like any home you own, you’ll be required to pay property taxes. You may, however, be able to deduct the expenses related to upkeep and maintenance on your taxes.
- Financial impact: You’ll have to cover any costs related to listing your home, including any repairs that need to be done beforehand, real estate agent services, staging and closing costs.
- Tax liability: If you fall within certain tax brackets, you’ll be required to pay capital gains taxes on the difference between the fair market value of the home when you inherited it and the sale price.
Selling a home you’ve inherited from a loved one who has passed carries much responsibility. It’s already an emotional process, and adding the typical stress that comes with selling any property can easily be enough to send even the calmest, coolest, and most collected person over the edge.
Arming yourself with the information and resources provided in this guide will prepare you for any obstacles that may cross your path, making the sales process smoother and more bearable.
At The Opland Group, we specialize in assisting with inherited homes in Columbus and Central Ohio. Don’t spend time worrying about upkeeping the property, hiring a Realtor, fixing up the property, cleaning out the property, waiting for months for the house to sell, or negotiating with buyers. Have the peace of mind that your inherited house is sold and you can move on.
Do you want to sell an inherited home in Central Ohio? We can help! Send us a message or give our team a call now at 614.332.6984!