I Just Inherited a House. What Are My Options?
Inheriting a house can be a life-changing event. Managed correctly, an inherited home may significantly improve your long-term financial picture, whether you sell it for a windfall or choose to keep it as a primary residence or rental property.
First, however, there are substantial considerations to make, including whether to keep the house and why, how you’ll manage any outstanding debt on the property and how to work with any fellow inheritors.
Get some professional advice
If you’re honored but overwhelmed by your inheritance, that’s completely understandable. Inheriting a house introduces a number of new variables into your life, but you don’t have to go it alone.
You may choose to assemble a team of trusted advisers who can help you gain understanding of your legal and financial options relating to the property. You may choose to work with a lawyer (preferably one with estate planning and real estate expertise), estate planner, accountant and/or financial adviser, and you can work with a trust officer and philanthropic consultant as well.
There are many decisions to make regarding an inherited property, particularly when it comes to any debt associated with the house, taxes you’ll owe as the heir and how buying or selling the home will impact your finances. The best-case scenario is having a collaborative team that communicates regularly. That way, each person can step up at various points in the process.
“You should not be talking to your accountant on your own, talking to your attorney on your own and then not having any of them talking to each other,” said S. Mark Alton, president of the National Association of Estate Planners and Councils (NAEPC) and a CFP and accredited estate planner (AEP).
At any point, you may need to rely more heavily on an accountant to evaluate the tax situation, an attorney to explain your legal options with regard to ownership and buying out other heirs or a financial adviser to discuss how best to maximize your new asset.
Most advisers will agree that a cooperative approach is best, Alton said, and looking for experts who have the AEP designation can increase your chances of finding strong, collaboratively minded team members.
Evaluate the situation
With your legal and financial team’s guidance, take a full accounting of the property. Find out:
- Is there outstanding debt on the property?
If the previous owner was still paying their mortgage or owed back property taxes, you’ll be responsible for paying those off if you want to take ownership of the house. The amount of debt could affect your decision on how to handle the property, as well as the amount of money to which you’re entitled from a sale. If there are not enough assets in the estate to pay the debt, you may have to sell the home to pay the debt before proceeds can be distributed, Alton noted.
You also have the option of taking over the mortgage. Once the title is in your name, you can work with the borrower to put your name on the loan as well. At that point, you may choose to pay off the remaining balance, request a modification to the terms based on your financial circumstances or continue making payments on the loan as-is. The Consumer Financial Protection Bureau implemented a rule in 2014 stating that lenders need not subject inheritors to Ability-to-Repay requirements before naming them as the borrower on an inherited property.
- Was there a reverse mortgage on the house?
You need to know whether the previous owner took out a reverse mortgage on the house, as there could be a significant amount of money still owed on that loan. With a reverse mortgage, the homeowner does not have to pay the principal or interest until they move out of the home, at which point the remaining balance comes due. The person who willed you the house may not have paid off the loan, and you’ll need to decide whether to pay it off to keep the house or sell the property.
You have several options for how to handle a reverse mortgage. Should you decide to sell the house, you can keep any proceeds above what was owed on the mortgage. Selling immediately will help you avoid capital gains taxes on the inherited property, but if you sell a few years down the road, your taxes will be assessed based on the home’s value when you inherited it.
If the property has depreciated in value or you can’t sell it for a profit, you can negotiate a short sale with the lender and sell it for no more than 95% of its value to settle the debt. Alternatively, you can allow the home to fall into foreclosure or sign a deed in lieu of foreclosure to return the house to the lending bank. In either of those two scenarios, you won’t be responsible for paying the mortgage.
- What is the home’s value?
An appraisal will determine what the home is worth, and that may influence your decision to keep the home or sell it. You may decide a low-value property in need of serious maintenance isn’t worth the investment. On the other hand, a house that’s in good shape might serve as a nice vacation or rental property.
The home’s value will also determine how much you owe in taxes. Inheritance tax laws vary throughout the U.S., but you could be subject to estate, capital gains and other taxes.
- Do you need to pay or cancel any utilities?
Find out which, if any, utilities are still being charged to the property, and whether there are any outstanding bills. Unpaid balances will need to be handled regardless of what you choose to do with the home, and you may not want to be paying for services such as water and electricity while no one is living there.
- Are there other heirs with a claim to the house?
It’s critical to find out whether there are multiple heirs to the property. Perhaps you’re one of several children or grandchildren inheriting the house. In that case, you’ll need to find out everyone else’s intentions. If several of you want to keep or live in the house, you may be in for some challenging discussions about how to make that work. If some want to sell and evenly split the proceeds, those who want to keep the house may need to work together to buy the others out.
Situations in which there are multiple heirs to a property can quickly become complicated. You won’t be able to sell the property unless the other heirs agree, and someone will need to maintain the house until a decision is made. But maintenance is costly, and even if you take on the caretaking role, you won’t have a stronger legal claim to the house.
The best thing to do is find out who has a stake in the house and communicate early and often about everyone’s intentions and expectations.
Decide whether to sell or keep the house
If you inherited the home from a loved one or have strong emotional ties to the property, your instinct may be to keep it at all costs. But that may not be right decision for your long-term financial stability.
Once you fully understand the debt on the property, the home’s value and the tax implications of keeping, selling or renting the house, you’ll be better equipped to decide what to do with it.
The tax implications can be especially complex based on your circumstances and situation. For instance, if you sell the house, you’ll likely need to pay taxes on the proceeds of the sale. But if you move into the home and make it your primary residence, you will not be taxed. Should you live there for two years or more, you may not have to pay taxes if and when you do choose to sell.
Mapping out the options and obligations with your legal and financial team will give you the information you need to see how this property fits into your future.
Alton recommended working with a financial planner to determine where you are now in relation to your future goals. He advised integrating inherited assets into your overall financial plan by looking at how they impact your financial needs and what you can realistically expect to earn on them. An inherited house might seem like the perfect opportunity to generate income by renting it out or flipping it, but you need to examine the potential costs and returns.
Renovations, maintenance and property management expenses can add up, and you should consider the plan within the context of the market as well.
After evaluating the property, you may realize you don’t have the time or resources to turn the house into a rental home, and that you don’t want to live in it yourself. In that case, you’ll likely choose to sell. But then you need to consider what to do with the proceeds of the sale. Your financial adviser may help you explore those options.
How to finance an inherited house
If you decide keeping an inherited house is in your best interest, chances are you’ll need to borrow some amount of money to pay off existing debts or buy out other heirs. A cash-out refinance will allow you to put the mortgage in your name and, ideally, secure a more favorable interest rate on the loan while freeing up cash to address those expenses.
When the previous owner of the home passes away, the house technically becomes the property of that person’s estate — and banks cannot lend to an estate. However, you should be able to work with your attorney and the lender to pay off the mortgage or refinance the loan into your name. You can use the money from the refinance to buy out any other heirs’ shares in the property.
The bottom line
An inherited house can be a boon to your finances, as well as a significant remembrance of a beloved family member or friend. But choosing what to do with the property is a major task, and it’s likely not a decision you can make overnight. Enlist experts you trust to help you fully understand the asset and what keeping or selling it will entail. Having a trusted team supporting you can help provide stability during what might be a very emotional time.
With people waiting longer to get married, and housing prices and mortgage interest rates on the rise, it’s become more common for unmarried couples to consider buying a house together …