What To Know About Inherited Property

Losing a loved one is an emotional journey, and when you inherit property, it often adds a layer of complexity to an already challenging time. Now, you find yourself faced with decisions about what to do with this inherited property. From navigating the intricacies of inheriting a home with a mortgage to understanding taxes and other associated costs, this guide is designed to offer you the clarity and guidance needed to make informed choices as you manage your newly inherited property.

What Happens If You Inherit A House With A Mortgage?

Navigating the inheritance of a property with an existing mortgage introduces a series of crucial steps. These include identifying who bears responsibility for the mortgage, evaluating the current mortgage status and weighing the various choices available for managing the property's future.

You’ll Need To Determine Who Is Responsible For The Mortgage

Inheriting a property with a mortgage can include plenty of complicated considerations. When it comes to sole or shared ownership with multiple heirs, following the probate process is necessary and recommended. When inheriting property with a mortgage, the responsibility for mortgage payments typically falls on the new owner(s). In the case of sole ownership, the heir becomes solely responsible for the mortgage. In shared ownership scenarios, heirs often need to work together to either continue making payments collectively or buy out each other's shares. It is crucial to consult an attorney, preferably one with expertise in real estate and probate matters, to navigate the legal aspects of inheritance and to engage with the mortgage lender to understand the options available, such as assuming the existing mortgage, refinancing or selling the property.

You’ll Need To Assess The Status Of The Mortgage

When you inherit a house with a mortgage, you should first take a good look at its financial standing. Check if the mortgage is all up to date or if it's in a bit of a tight spot with missed payments or negative equity because this can impact your next steps as the heir. Additionally, it would be wise to determine whether or not the previous homeowner had mortgage protection insurance, which can make a big difference in how much you owe.

Bear in mind that there is a big difference between inheriting a home with a regular mortgage versus a reverse mortgage. Regular mortgages entail standard monthly payments, while reverse mortgages, which are usually for older homeowners, may require the homeowner to consider selling or refinancing the home.

Grappling with an inherited property can be a lengthy and complex process with its fair share of legal and tax issues. Consider consulting with a knowledgeable attorney who can aid in the inheritance process and provide valuable guidance along the way.

You’ll Need To Decide What To Do With The Property

Once you've inherited a property, there are plenty of options regarding what to do with the home. Opting to assume the existing mortgage can provide a sense of stability, especially if the terms are favorable, as it allows you to retain the property without the burden of securing a new loan. However, it's crucial to thoroughly evaluate the mortgage terms, property value and your long-term goals to determine whether this option aligns with your financial objectives.

Other times, if it’s not practical to be responsible for an additional property, you can always sell the property. Selling an inherited property, for the most part, will warrant the same process as selling any other home, however, in some cases where there is more than one heir, each beneficiary will need to come to an agreement about how to proceed. If the heirs come to an agreement to divide the proceeds, next, the heirs should consult with a real estate agent in the local market to help sell the property at a competitive price.

In cases where heirs wish to buy out other beneficiaries and assume sole ownership of the inherited property, they must establish a fair property valuation and agree on a buyout price. Be prepared to provide legal documentation, such as a purchase agreement, to formalize the transaction. The buying heir may need to secure financing, either through a mortgage or cash payment. Consulting with an attorney for legal aspects, a real estate appraiser for property valuation and a mortgage lender to secure necessary financing is advisable to facilitate a smooth and equitable buyout.

Prior to even selling the home, you’ll need to ensure that you or the heirs have the legal right to sell the property. This can be concluded after going through the probate process. After you've obtained the right, be sure that the title is officially transferred to your name as the heir.

What Happens If You Inherit A House Without A Mortgage?

Inheriting a property that has been paid off often simplifies multiple aspects of the ownership transfer and the next steps. With no mortgage payments involved, you have much more flexibility when making a decision such as renting out the property.

If you rent out the property, you’ll minimize the financial responsibility you’d typically have with a home with a mortgage. Renting out the property involves selecting tenants, maintaining the property and addressing any legal requirements, such as lease agreements. The rental income can be shared among the heirs, providing a source of revenue without the burden of mortgage-related expenses.

Additionally, this added financial freedom makes it easier to sell the home if wanted. You can set a competitive selling price, market the property and negotiate with potential buyers. The proceeds from the sale are typically distributed among the heirs according to their ownership shares. With no mortgage to pay off, you have more flexibility in determining how to divide the sale proceeds, making the process relatively simple and cost-effective. However, it's still advisable to consult with professionals to ensure a smooth and legally compliant transaction.

There are several options that become available and more accessible to heirs when there's no mortgage involved.

Taxes On Inherited Property

Inheriting property can involve various types of taxes that heirs may encounter when managing their property.

• Estate tax: Estate taxes are applied when an estate exceeds a certain threshold established by the IRS. These taxes are imposed on the transfer of individual assets upon the owner’s death. Estate taxes are usually assessed on the total value of the estate and can significantly impact the inheritance left to the beneficiaries.
• Inheritance tax: Often grouped together with estate taxes, inheritance tax is determined by the value of inherited assets as well as the relationship between the heir and the previous owner. Close family members often receive preferential tax rates or exemptions in some cases. Inheritance tax is a tax imposed by some states or countries on the assets or money received by heirs from a deceased person's estate.
• Capital gains tax: Capital gains tax is a tax applied to the profit made when you sell an asset, such as stocks, real estate or investments, at a higher price than what you initially paid for it. The amount of tax owed is calculated based on the difference between the purchase price (cost basis) and the selling price, with special rates applying to long-term assets held for over a year.

Other Costs Associated With Inherited Property

Typically, when selling an inherited property, selling costs will likely be the greatest fee an heir will encounter. You might face costs such as real estate agent commissions (usually around 5% – 6% of the sale price), closing costs (which can include title insurance, escrow fees and other miscellaneous expenses) and potential repair or renovation costs to make the property more marketable. It's essential to consult with a real estate professional or attorney to get a more precise breakdown of these expenses based on your specific situation and location.

When you keep, move in to or rent out an inherited home, you may encounter several other hidden fees that homeowners and heirs should consider.

Appraisal fees are almost inevitable when inheriting a home because they are usually required or highly recommended by real estate professionals. These fees cover hiring an appraiser to determine the market value of the home, in hopes of an increased value. Appraisal cost can vary depending on the size and complexity of the property, however, it’s usually not a major cost.

If you decide to keep the property and rent it, you’ll most likely be faced with a series of maintenance costs. Similar to appraisal fees, these costs can vary depending on numerous factors reliant on the property and tenants. These fees are usually ongoing and can encompass a home’s repairs, landscaping and general upkeep. Choosing to keep an inherited home also suggests utility fees, which can be grouped with maintenance costs. These can include water, gas and electricity bills. These fees are vital to the property's value and long-term condition. 

FAQs: Inherited Property

Explore the frequently asked questions below for insights into inherited properties.

What are the requirements for homeowners insurance on inherited property?

The requirements for homeowners insurance on inherited property are typically similar to those for any other property. Homeowners insurance is essential to protect against risks like fire, theft and liability. The specific requirements may depend on the property's location, condition and any lender or legal obligations, but insuring the property is generally a wise and often necessary step for homeowners.

When does an inheritance become marital property?

If you’re married and receive an inherited property, the property could be considered marital property instantaneously once you've obtained ownership.

How do I avoid paying capital gains tax on inherited property?

To potentially avoid paying capital gains tax on inherited property, consider taking advantage of the "step-up" basis, using it as your primary residence to qualify for the Primary Residence Exclusion, or exploring options like a 1031 exchange or charitable donation. Consulting a tax professional for personalized guidance is essential, as strategies may vary based on your specific circumstances and tax regulations.

Is there federal inheritance tax on property?

In the United States, there is no federal inheritance tax on property. However, some states have their own inheritance taxes, which may apply to property inherited by residents of those states.

How is inherited property taxed when sold?

Inherited property is subject to capital gains tax when sold in the United States. The tax is based on the difference between the property's fair market value at the time of inheritance and the sale price, with potential exemptions and tax breaks depending on the circumstances and current tax laws.

How do I report the sale of inherited property on my tax return?

To report the sale of inherited property on your tax return in the United States, you need to calculate the capital gain or loss by subtracting the property's fair market value at the time of inheritance from the sale price. You would typically include this information on your federal income tax return using Form 1040. Be sure to consult a tax professional for assistance.

Is there a time limit on selling inherited property?

There is generally no specific time limit for selling inherited property. However, it's essential to consider factors like property maintenance costs and potential tax implications, as the longer you hold the property, the more these costs may accumulate.

The Bottom Line: Know Your Legal And Financial Responsibilities For Inherited Property

Inheriting a property can be a highly complex journey, but it’s important for heirs and beneficiaries to understand their rights and responsibilities before obtaining ownership of a new home. There are numerous options available to heirs, and when armed with the proper guidance and knowledge, homeowners can make wise decisions best suited for them and their families. However, sometimes these decisions warrant some guidance. For a smooth inheritance process, contact a real estate agent or attorney who can provide useful advice.