Having a loved one pass away is an emotional experience, and handling their estate afterward doesn’t make the feeling much better. Take the house they leave behind, for example. It could be your childhood home or a newer property your parents had bought after moved out. Either way, inheriting your parent’s house leaves you a significant part of who they were.
Once you gain ownership of the home, you can do whatever you wish with it, but it comes with financial obligations. You can put your inherited house up for sale, then pay taxes later, depending on the state you live. You can also have it for rent or live in it and make it your permanent home.
That said, here are the financial obligations of inheriting a house:
House Repair or Maintenance
The first thing you should do after inheriting the house is to inspect it thoroughly. There could be fixtures that you need to repair, and the whole house might need better maintenance. If you’re going to sell the house, its value will increase if there are no broken parts. You can say the same thing for if you’re putting it up for rent. And if you decide to move into your inherited house, you can live much more comfortably if everything is in good to excellent condition.
Check when utility bills were last settled, as well as account statements, credit cards, and others. Children aren’t responsible for paying off their deceased parent’s debts unless they co-signed a loan or a credit card contract. The estate will be the one to pay off any remaining debt, and if the estate is insolvent, the debt will be negated, in most cases.
Owning the House
If you’ve inherited the house with siblings, and they aren’t interested in it, then you need to compensate them. Depending on what you have agreed on, you can pay them in a lump sum or monthly installments, or even by mortgaging. To make sure the terms are fair and transparent, you can hire a lawyer, though that would be an additional expense.
If you’ve all agreed to own the house together and put it up for rent, you might need to hire a professional property manager to operate a rental property. Putting up a property for rent takes a lot of responsibility and risks, and a property manager can handle them, from leasing to marketing to management. Turning the house into a vacation rental property is also an option, but maintenance and management costs will shoot up in this situation.
Some states require the payment of tax inheritance, so make sure to check the laws where the house is situated. There is, however, a “death tax,” or federal estate tax. The amount of death tax is calculated according to the total value of the estate. So, if the estate is worth tens of millions, then it would be subject to a large amount of federal estate tax. Smaller estates can also be taxed, so again, check out the laws of your state.
You can be eligible for the home sale tax exclusion if you sell the house. If you’ve lived in the inherited house at least two years of the last five years, you can avoid paying $250,000-$500,000 of taxes from the proceeds. On the other hand, if you plan to live in your inherited house for at least two years, then you won’t be exempted from this obligation.
If you’ve lived in the house for a while before selling it, it would have capital gains tax. You can calculate it from the increased value of the property. For example, the house’s value is worth $500,000 at the time of inheritance, and then you sell after a while for $510,000, then you would be taxed for the $10,000 value increase.
These financial obligations may only be the tip of the iceberg, so do your research well and plan carefully on what you will do with the inherited house. That property will hold a lot of precious memories, so make sure you only make the right decision for your inherited house’s future.