Beneficiaries must consider a number of possibilities when they inherit a home, especially if they’re sharing that gift with others. There are tax implications whether they keep or sell the home, emotional attachments to the house and the items within the house, along with potential estate planning issues.

MarketWatch’s recent article entitled “Inheriting a house? Read this before you make any rash decisions” explains that there’s no right or wrong answer, when choosing to keep or sell an inherited home. In some cases, the property can be used as rental income, whereas in other situations, it could be a source of cash after it’s sold, especially if the real-estate market is doing well. However, prior to deciding, consider this:

Those who sell a home after living in it for two out of the last five years get a tax exemption. For single filers, the exclusion is $250,000, and for married filing jointly, it’s $500,000. This exemption is applied when a home is sold to reduce the capital gains the sellers would have to pay.

Surviving spouses who inherit the full value of their home after their husband or wife dies can still use the $500,000 exemption, if they sell the house within two years of death. Non-spouses should consider if and when they plan to sell the home. Their basis of the inherited home becomes the fair market value on the date of death of the grantor. As a result, they’ll pay very little in taxes, if they sell the property in the short-term. However, they could have significant tax exposure, if they were to sell after a few years, or decades.

Beneficiaries should ascertain the fair market value of the home or get an appraisal on the property. Establishing the value of the property can pay for itself many times over in tax savings. Usually, there’s time to look at the situation and see you want to keep the property and either use it or turn it into a rental property or sell it.

If the home still has a mortgage, beneficiaries should call the lender to see if there were any clauses regarding the change in ownership. If the existing rate is favorable, they might be able to keep the loan, instead of refinancing.

An inheritance of a home can get more complicated, if there are multiple beneficiaries. This is especially true if it is children and grandchildren. If there’s no agreement, the only solution may be to sell. There are several options, such as selling the home and dividing the proceeds; renting the home and sharing the income; or coming to an agreement if one sibling wants to keep the house, like buying out the other owners, or trading other inherited assets for the property.

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.

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Reference: MarketWatch (April 13, 2021) “Inheriting a house? Read this before you make any rash decisions”