Inheriting a home from a loved one is both a tragedy and a gift, but the last thing it should be is an inconvenience. We want to go over some of the pros and cons to consider when deciding the fate of your inherited home, and hopefully help you avoid common pitfalls.
Regardless of how many people share in the inheritance, there are still only a handful of options as to what can be done with the home; live in it, rent it, or sell it. All three options have pro’s and con’s that should be known before deciding.
Live In It Pros
·If the home is owned free and clear choosing to live in it could save you a rent or mortgage payment every month.
·If you live in the home for two years before selling it you will be eligible for a tax exclusion on $250,000 for an individual, or $500,000 for a married couple, of the purchase price.
·Choosing to live in an inherited home can also give you time to go through the contents of the home at your leisure, whereas those contents will need to be completely or mostly removed before the home can be rented or sold.
Live In It Cons
·If the home is not owned free and clear you will need to assume the mortgage payments in order to keep the home. This may or may not be viable depending on the difference between your current payment and the new mortgage payment on the inherited property.
·The home may not be conveniently located near your place of employment or your children’s schools, making living in it unfeasible.
·Paying for repairs out of pocket can be costly but may be necessary depending on the condition of the home. If you are selling the home you can credit the repair cost to the buyer at closing, thereby avoiding paying for the repairs out of pocket.
Rent It Pros
·Renting an inherited home can be a long-term source of income if the conditions are right.
·Renting also allows you to keep the home in the family for potential future generations to use as a place to live or as a source of income.
·If you live close you can function as the landlord and save yourself the management fee, and if you are handy you can save money by doing maintenance and repair work yourself.
Rent It Cons
·If you rent the home, you will be responsible for repairing the condition of the home out of pocket before it can be rented.
·There are significant costs associated with renting such as management fees, repair and replacement costs, and insurance that, when added to the mortgage payment, might cause you to break even or even lose money on a monthly basis.
·If you are not able to serve as the landlord, a management company will cost you between 10% and 30% of the monthly rent.
Sell It Pros
·If you are too busy to deal with renting, or the home happens to be in another state, or is simply not in an area where renting is a possibility, the easiest solution is to cash out and wash your hands of the affair by hiring someone to liquidate the assets.
·Potential for a lump sum payout that can be used for other purposes.
·Avoid paying capital gains on the appreciated value of the property by taking advantage of the stepped-up tax regulation for beneficiaries. This means that when you inherit a home the value is assumed to be the fair market value of the property on the day of the previous owner’s death. (Normally you would pay capital gains on any appreciation in value between the purchase price and the sale price.)
Sell It Cons
·If the mortgage is upside down, i.e. the appraised value of the home is less than what is owed, you may not make any money off the sale. The same thing goes for unpaid taxes, mechanics liens, and any other cloud on title.
·The home will need to be made marketable, which means emptying the former residents’ possessions, something that can be very emotional considering you are likely still mourning the loss of a family member.
·You may be trading a significant amount of long-term income for a short-term payout. The best way to know is to ask an experienced real estate agent or property manager to assess the local market and advise.
As always, regardless of what option is best for your situation, the experienced professionals at Sellstate Alliance Realty and Property Management are available to answer your questions and address your concerns.