What To Do With Inherited Real Estate
Inheriting property from a family member can be a taxing experience. It can be challenging for many to navigate complicated tax and mortgage concerns while also taking the time to grieve the loss of a loved one. If you’ve recently lost a parent or other family member, or you’re getting your affairs to prepare for the inevitable, it’s wise to educate yourself on the specificities of inherited real estate.
There are three basic ways to handle inherited real estate: moving in, selling, or renting. Though many factors are involved in making a decision, you’ll likely end up profiting from your choice. Consider variables such as taxes, mortgage, repairs, maintenance, and other owners (i.e., siblings).
With the proper knowledge and preparation, everyone can end up happy. Keep reading to learn about what you should do with inherited real estate.
If you’re currently in the market for a new home, inherited real estate is worth considering. Maybe the property was your childhood home and had sentimental value, or perhaps you don’t feel like dealing with the headache of renting it out. Moving into your inherited house can be an easy fix to two problems. However, there are a few things to consider before you get settled.
Your needs as a resident
First, consider whether the home fits your needs as a resident. Is it in the right location? Will it be the right size? Is the house in good shape? These are questions you should be asking yourself before making any big decisions.
Moving is no easy task, and while a home might have sentimental value, it might not be suitable for you.
You will need to pay yearly property taxes on real estate you keep. This amount will vary based on the house’s location; if you’re in San Diego County, for example, your property tax will be 0.73% of your assessed property value. So, when you inherit a $2 million home, you’re also inheriting $14,400 in yearly property taxes.
You might want to consider any special repair needs for your new home. If you inherited the real estate from an elderly parent, there’s a chance they neglected some critical repairs and maintenance over the years. You’ll need to decide whether or not you can take on those repairs from a financial perspective, and based on your timeline – can you wait for completed renovations?
Does the home have an outstanding mortgage? Your inherited property may have a regular or reverse mortgage that’s outstanding if you decide to keep your home. In some cases, the estate will pay off the mortgage, but you’ll need to look into the details of your estate plan.
Renting Out Inherited Property
Maybe you aren’t ready to give up your home, but you aren’t prepared to move in. Renting out an inherited property is a great way to earn additional income, and it allows you to keep a home with sentimental value in the family. However, it requires a lot of attention and may cause a serious headache if you’re dealing with bad tenants. Here are a few things to consider when renting out inherited property.
Repairs, property tax, and management
Similar to your move-in option, renting the property will likely require some investment on your end. Inherited properties often have a significant amount of deferred maintenance. You will need to pay out of pocket for these repairs. However, addressing necessary repairs and renovations could increase the rental value of the property. Other things like property tax and mortgage will need to be handled by you, the owner. If the inherited real estate is far away from your current residence, you’ll also want to pay for property management to handle the needs of your renters.
In many cases, more than one recipient can inherit property. You and your siblings may be struggling to find the right solution between selling or keeping a home with sentimental value. Renting can provide a steady income for all homeowners, all while maintaining ownership if someone wants to move in in the future.
Selling Inherited Property
Selling is a great way to turn the inherited property into cash flow. If you and your siblings prefer immediate profit to years of investment, many added benefits come with your decision to sell.
Capital gains tax
Capital gains tax on inherited property is paid on a step-up basis, meaning you’ll only pay tax on the increase in value from the time of inheritance to the time of sale. For example, let’s imagine your parents purchased a home in San Diego, CA for $500,000 in 2009. By the time you inherit the house in 2021, it’s worth $1.5 million, and sale prices in the area are increasing rapidly.
Lucky for you, you won’t need to pay capital gains tax on the total value of the property if you sell right away. If you wait one year and the value rises to $1.6 million, you’ll only pay tax on the $100,000 increase in value. The step-up tax basis provides a considerable incentive for the quick sale of estate property. You’ll save money in taxes and avoid many of the costs required to hold onto the home.
Get a Fast, Free, Fair Cash Offer
If you’re dealing with a fluctuating market or you don’t want to deal with the time, money, or stress of making repairs, Blueprint Homes can help you sell in any condition. There is no need to pay for expensive renovations or deal with difficult tenants and costly property management – you can turn your inheritance into actual, tangible cash flow. If you’re ready to part ways with an inherited property or you want more information about cash sales, Blueprint Homes is here to help. Give us a call or set up a consultation.