If you inherit a house, there are tax and financial issues. Yahoo Finance’s recent article from (December 21, 2020) entitled “What to Do When You Inherit a House” gives us some topics to keep in mind if you inherit a house.
Inheritance and Estate Taxes. Inheriting a house doesn’t usually mean any taxes because there’s no federal inheritance tax. But some larger estates may have to pay federal estate taxes. There are also six states that have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The spouse is exempt from paying inheritance tax, and children and grandchildren are exempt from inheritance tax in four states (not PA or NE).
Capital Gains Taxes. This may be a concern if the heir decides to sell the house. Capital gains taxes are federal taxes on the profits on the sale of assets. Short-term capital gains taxes apply on sale of assets owned for a year or less, and long-term capital gains taxes are for the sale of assets owned for longer. However, when a house is transferred by inheritance, the value of the house is stepped up to its fair market value at the time it was transferred, so that a home purchased many years ago is valued at current market value for capital gains.
Exclusion. Also, if the heir occupies the home as his or her primary residence for at least two out of five years, the IRS may grant an exclusion of up to $500,000 on capital gains taxes for a couple filing jointly or $250,000 for a single filer.
Mortgage. If the home has a mortgage, there will be monthly payments to make.
Reverse Mortgage. If there is a reverse mortgage, a type of home loan available to seniors age 62 and older, the ownership of the home will transfer to the mortgage company when the owner dies.
Short Sale. If the house is underwater, with a mortgage balance more than the home’s value, the new owners may ask the lender to do a short sale, selling the property for less than the loan balance and accepting that amount to settle the debt.
Other Expenses. If the home is paid off, there still could be major repairs to be made before it can be sold or occupied. There are also ongoing costs for property taxes, utilities, residential insurance and maintenance costs, as well as possible home owner association fees.
The Heir’s Options. Three options when a home is inherited are for the heir to occupy it, sell, or rent it. Occupying the home means it will stay in the family, which can be nice if there are memories connected with the property. If there is no mortgage, this can also be an economical option. Selling it provides cash if it’s worth more than the mortgage after any necessary repairs. This is a quick and easy way to make the most of a home inheritance without adding any future risks. Finally, renting it can provide passive income and some tax advantages. However, being a landlord involves costs and dealing with tenants can require a lot of time and attention.
Emotional and Relationship Issues. Inheriting a home that’s been in the family for decades can bring up a lot of feelings for the heirs. If multiple heirs were each bequeathed part ownership, it can be difficult to determine what everyone wants and choose a mutually acceptable course of action.
Heirs can ask for the help of an experienced estate planning attorney to facilitate discussions and to make sure that everyone understands the agreement.
Inheriting a house can have tax, financial and emotional considerations to consider, and a lot is dependent on the size of the mortgage, the home’s value and the costs of upkeep.
One of the main goals of our law practice is to help families like your plan for safe, problem free, and successful transfer of assets to the next generation. Call our office today to schedule a time for us to review your estate plan and identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
For more information and articles on estate planning, probate, trust law, and business planning, please visit our website and subscribe to our monthly e-newsletter.
Reference: Yahoo Finance (Dec. 21, 2020) “What to Do When You Inherit a House”