Inheriting Your Parent’s House: 3 Options to Consider
Inheriting your parent’s house is an emotionally heavy topic. Why? Because most inheritances follow a death in the family – and that death may or may not have been expected.
On top of dealing with the inheritance itself, you may have other challenges to navigate at the same time. Perhaps you’re struggling with grief or dealing with grieving siblings and their issues. Or maybe the home you’ve inherited is the one you grew up in, which means you’ve got an aching sentimental attachment to deal with, too.
Either way, you’ve got three main options to consider when you inherit a home; you can sell it, rent it out and become a landlord, or move in and live there. But, which one is best?
Tax Considerations to Ponder When Inheriting a House
Before we dig into your three options and their pros and cons, I wanted to touch on the topic of taxes for a moment. But first, a disclaimer: I am not an accountant or tax professional.
The main issue I want to raise is that there could be tax consequences that arise from how you handle your inherited home. The tax implications may depend on the size of the home or estate, whether you sell or rent out the home, and whether your parents have a mortgage or lien on the property.
Regardless, my advice is to consult a Certified Public Accountant (CPA) to learn what the tax consequences could be for each of your options. Since laws vary by state and each situation is highly unique, the only way to get accurate advice is to speak with a professional.
Once you speak with a professional accountant, you may find you’re better off dealing with your parent’s home in one specific way. But you may not gain this insight unless you sit down with a professional and ask. In the case of a big inheritance, it’s usually well worth the few hundred bucks you’ll pay to get advice tailored to your situation.
Option #1: Selling an Inherited Home
As I mentioned already, there are three main options to consider when you inherit a home. The first one, and the most popular, is selling the home and moving on with your life.
Since you’ll be free from the home once the sale is complete, this is typically considered the “cleanest” and most beneficial option for all parties involved. Plus, it could be the most profitable as well. If your parents bought their house several decades ago, their property values may have grown tremendously.
One important detail to consider is that most of our clients have been able to take advantage of a step-up in the cost basis when selling an inherited home. What this means is, you may be able to sell the house and collect tax-free profits based on its current value – not what your parents paid many years ago. So, if you inherit a house that’s worth $200,000, you may be able to sell the home for that price and pocket the proceeds tax-free.
Now let’s say you decide not to sell the home. In that case, your cost basis for what the home is worth would begin that day. In other words, if you keep the $200,000 home and move in or rent it out, your new basis starts at the home’s current market value. So, if you ultimately sell it a few years down the line for $300,000, then you have a $100,000 gain that is considered “long-term capital gains.”
One of the biggest benefits of selling your parent’s home right away is that, if you have siblings, it’s very easy to divvy up the proceeds. Once the sale is made, it’s usually a matter of splitting the proceeds evenly across each remaining child.
Of course, there are times when siblings just can’t agree. Maybe you want to keep the house and your siblings don’t, or you want to sell and they hope to rent it out. In these cases, it’s always smart to talk through the issues and try to reach a compromise with your siblings without getting lawyers involved.
Once legal counsel gets involved, the costs for all of you will surge. And if you’re trying to make sure your inheritance benefits you, you don’t want to spend it all on a legal battle.
Option #2: Renting the Home
Another popular option for individuals who inherit a home is renting the home out. Not only can this be a great way to retain ownership of a property you care about, but it can be a boon to your income, too.
Becoming a landlord may not be your dream, but it could help you achieve your dream of somewhat-passive income. Each time you renew a lease and get a new renter, you’ll likely increase the rent. This will help you keep up with inflation, and score some monthly income you can count on once you reach retirement.
As an added bonus, you may score some tax benefits in the form of depreciation. This all depends on your tax situation, so make sure to consult your accountant before you get too excited.
You should also keep in mind that functioning as a landlord isn’t everyone’s cup of tea. There’s always the chance you’ll end up with unruly tenants, or that someone will damage the home. As a landlord, you’ll need to take care of regular repairs along with disaster situations, and be available at a moment’s notice.
If you don’t like the idea of dealing with tenants or vacancies, you can also hire a property manager for around 10% of your rental income each year. This expense is worth it to a lot of people who own property, but may be unbearable for others.
Also, keep in mind that renting out the property may be something you do temporarily. Perhaps you want to be a landlord for ten years and sell the property down the line. Depending on your situation, this option could be beneficial as well.
Option #3: Moving In to Your Parent’s Home
The last option to consider when you inherit a home is moving in. If you don’t want to sell or become a landlord, this could be the best option for you.
Moving in your parent’s home can be especially attractive if the house is entirely debt free. Without a mortgage to worry about, you’ll only need to worry about keeping up with property taxes, insurance, and upkeep. If you’ve been overseeing your parent’s affairs, you may even be aware of what these ongoing expenses are already. If not, you’ll want to get a general idea of the average monthly expenses before you pull the trigger and move in.
If your parents have occupied the home for a long time, you may also need to create a budget for repairs. Before you move in, ask yourself if the plumbing is in good order, if the roof needs repairs, or if the home needs new floors, new windows, or any other updates.
If you have siblings, you should also plan to “buy them out” of their share of the home. While it may be fairly easy to assess the home’s value and strike a deal, you may need to consult with a lawyer and/or a C.P.A. to determine the best way to do this.
Inheriting your Parent’s House – Conclusion
Inheriting a home can be stressful if you aren’t prepared. That’s why the best step you can take now is to talk with your parents while they’re still here. With proper communication, you can figure out the best way to handle your parent’s home once they’re gone.
While it may be uncomfortable to make these decisions early, the best way to ensure a smooth transition once the time comes is to start planning now. If you wait until the last minute to start thinking this decision through, it will only make dealing with the loss of your parents that much harder.
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