Dealing with the death of a loved one is hard enough, but it often becomes more complex when you have to figure out what’s going on with their assets and debts.
If they’ve left behind a house, that’s one of the bigger responsibilities that you, as the person’s next of kin, will have to figure out how to deal with. Not only do you have to worry about the mortgage, but there’s the issue of estate taxes. Let’s take a look at these one at a time.
If the property has a mortgage on it when you inherit it, you may have a few options in terms of dealing with it, but there are a few things you need to clear up before you can decide what your game plan is.
Who’s Responsible for the Property?
Before we worry about anything to do with inheritance, we need to determine if the mortgage had a cosigner. If the loan had a cosigner, that person is responsible for continuing the loan payments following the owner’s passing.
If there’s no cosigner, one of two things can happen:
- If the person’s spouse isn’t living there and there are no other family members that are heir to the property, the lender can take possession of the property and attempt to pay off the remaining loan balance by selling the house. If the sale doesn’t cover the existing balance, the lender may be able to seize other assets to cover the remainder of the debt, or they may simply have to assume the rest of the debt. The lender’s options vary depending on where you live.
- If the person has a surviving spouse that still occupies the property, they can continue to make the mortgage payments regardless of whether they were initially on the loan. The same can be said if the house is inherited by a family member, whether it’s through the will or probate.
What Are Your Options?
If you inherit a mortgage and want to keep the house, the first thing to do is contact the servicer of the loan. They’ll need to see a death certificate and verify that you’re the heir of the house before they can give you more information on the loan balance.
Once that’s done, you’ll be able to consider your options. If you have the money, maybe the best option is to just pay off the house. You can do whatever you want with it, including sell or rent it out, unencumbered by a mortgage.
This option may be particularly attractive if you can pay it off with your life insurance and not touch the rest of the funds in the estate. And then there’s mortgage life insurance which pays out in the event that the mortgage is not paid off at the time of death.
If you don’t want to pay the whole mortgage off, you have the option of continuing to make the payments. In certain instances, you may even be able to refinance the mortgage.
Houses are included in estate taxes. If the house is being passed to heirs, they will have to pay taxes on the fair market value of the property out of the funds and assets in the estate. Consult a tax adviser to go over your options for determining fair market value.
If you sell the property later on for more than the fair market value at the time you inherited it, you’ll have to pay capital gains tax on the difference between the sale price and the fair market value. For example, if the house was worth $100,000 at the time of the person’s death and the heirs later sold it for $105,000, they would pay capital gains tax on $5,000.
Grieving the death of a loved one is hard enough without having to worry about any financial responsibilities left behind. Talk to your family members about finances so that everyone can be better prepared if something happens.
Still have questions? Leave them in the comments below, and we’ll do our best to answer them. When dealing with houses and estates, we recommend consulting a lawyer or tax adviser for the best advice.
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