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Inheriting A House? Here Are Your Options

7-Minute Read
Published on May 18, 2021
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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 you’ll also have to contend with taxes, upkeep, sharing ownership with other stakeholders and more. Let’s take a look at these one at a time.

You Have Three Options With An Inherited Property

If you’ve recently inherited a piece of real estate and aren’t sure what to do with it, your choice will come down to one of three options: move into the house, sell it or rent it out as another source of income.

Each option comes with its own set of legal, financial and emotional implications, which means you’ll want to deeply consider all three before making a final decision. Converting the home into a rental, for example, may seem like a great way to profit off the home without selling it, but managing landlord responsibilities is no simple feat – especially if you’ve never managed rental properties before.

Here are a few factors you and the rest of the home’s heirs should consider before you make your final decision.

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Mortgage

If you inherit a mortgage alongside the property, 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 co-signer, that person is responsible for continuing the loan payments following the owner’s passing.

If there’s no co-signer, one of two things can happen:

  • If the person’s spouse isn’t living at the home 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 who still occupies the property, they can continue to make the mortgage payments toward the person’s after-death debts, 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 any life insurance6 and not touch the rest of the funds in the estate. And then there’s mortgage protection insurance, which pays out in the event that the mortgage is not paid off at the time of death.

In situations where the loan contract includes a due-on-sale clause, immediate repayment might be the only choice you have if you want to inherit the home without occupying it. This type of provision states that in the event of a transfer of ownership, the existing mortgage must be paid in full. We recommend consulting and estate attorney because your rights may depend on where you live and your relationship to the deceased.

The flipside is an assumable mortgage, where you, the new owner, would “assume” the existing mortgage you inherited with the house. Assumable mortgages use a regular, monthly payment cadence, which can help you afford the inherited home. In any case, you’ll want to have a clear grasp of the legal ramifications of the home’s existing mortgage to understand how it will impact your repayment plans.

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.

Taxes

Taxes play a part in buying, selling and renting inherited properties, but the type and amount of taxes you’ll have to pay will depend on your final decision and your specific circumstances.

Estate Taxes

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.

Capital Gains Taxes

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.

Step Up In Basis

Keeping those capital gains taxes low isn’t always easy, but inheritors do have one helpful tool they can use to better manage their taxes. A step up in basis ensures that an heir only has to pay capital gains taxes on the difference in appreciating value between the date of the original owner’s death and the day on which the heir decides to sell the property.

Repairs

In a perfect world, you would be left a fully functioning house that you could live in, list or rent out as soon as you get the keys. But for many heirs, inheriting a house means inheriting all the problems that come with it. These could range from small, decorative touches that will make the house more competitive on the market to larger projects required to make the space livable.

The current condition of the home may help guide your final decision, as the amount of work you’ll need to put in the home can depend on what you decide to do with it. Here are a few factors to consider:

  • If you want to live in the house yourself, then you’ll only need to ensure that the space is safe. Any decorative or nonessential improvements are at your discretion.
  • Renting out the house will require a bit more work. Although renters may not care about more substantial fixes – as the expectation is that the landlord will still be responsible for repairing them – you may have to upgrade some appliances and add unique design features in order to make the space stand out against other apartments.
  • Because buyers will want you to complete all major renovations before they purchase, putting the home on the market could demand the most repair work. Start by conducting a home inspection to get an idea of how much time and resources you’ll have to put into the property.

Co-Inheritance

Inheriting a house often becomes much more complicated when parents leave the property to multiple heirs – particularly if the stakeholders have conflicting opinions on the best way to move forward. If your parents granted an equal portion of the property to each child during their estate planning, then you all have equal say in the outcome. So how do you come to a final decision without damaging your relationships with them?

If you want to keep the home but your siblings want to sell, the solution could be to refinance and buy out the other heirs. A buyout essentially means that one heir becomes the sole homeowner of the property, allowing the other heirs to walk away with their portion of the inheritance. This option can reduce family disputes down the line, as it will prevent you and your siblings from arguing over who owns what.

If, on the other hand, everyone agrees to keep the home in the family, then the next step is to decide how you want to use the property. Homes near lakes, mountains or other attractions translate well into vacation homes – so long as you and your siblings are OK with sharing. Or, you could decide to partner with your siblings and put the home up for rent. Keep in mind that you and the other heirs will need to clearly define each person’s responsibilities when you apportion landlord duties.

Families who can’t come to a decision may need to involve a third party, such as a judge, to make an impartial decision on the best course of action.

The Bottom Line: Make The Best Financial Decision For Your Family

Grieving the death of a loved one is hard enough without having to worry about any financial responsibilities left behind. But having to balance these new duties with your grief can make it even more difficult to make the best decision.

If you’re struggling to find the best path forward, try to remove the emotions from your decision-making process. Regardless of how you decide, you should make sure your choice serves your financial needs first and foremost. Talk to your family members about finances so that everyone can be better prepared if something happens.

Still have questions about your newly inherited property? Read our tips to make the most of your inheritance. Or, leave your thoughts 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.

Kevin

Kevin Graham

Kevin Graham is a Senior Blog Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Rocket Mortgage, he freelanced for various newspapers in the Metro Detroit area.