What To Do After Inheriting A House
What To Do After Inheriting A House
Listen, watch, or read the eigth episode of Planning for Inheritance.
Katherine Fox, CFP®, a wealth manager for inheritors and an inheritor herself explains everything inheritors need to know, whether they have already inherited a house or think they may in the future.
Posted on April 18, 2024 by Katherine Fox.
What To Do After Inheriting A House
What do inheritors need to know about inheriting a house?
A house is maybe one of the most common things that people inherit.
But it's not always an easy or straightforward process.
I'm Katherine and I'm a CERTIFIED FINANCIAL PLANNER™ and the founder of Sunnybranch Wealth, a fee-only investment advisory firm dedicated to helping millennial and Gen Z inheritors figure out what to do with inherited wealth and how to create positive impact along the way.
In today's episode of Planning for Inheritance, we're going to be talking about everything inheritors need to know after inheriting a house.
A house is maybe one of the most common things that people inherit.
But it's not always an easy or straightforward process.
You could be dealing with tax issues. You could be dealing with family feuds. You could not have any idea how to clean out a house that is full of your parents' junk.
We're gonna dive into all of that.
And if you have inherited a house or you think you might in the future, you are going to be prepared no matter what comes your way.
The first thing you need to do after inheriting a house is secure the property.
The first thing you need to know about inheriting a house is what immediate steps you need to take after you inherit. The first thing you need to do is lock that property down.
You don't know who had access to that property, who might have keys, who might be planning on strolling into your parents' house and taking some things that they like or that they feel like belong to them.
When you inherit a home, you want to change the locks, you want to make sure that the only people that can access the house are people who actually own the home. You also may want to beef up security a little bit on the house because you don't want people looking at that obituary and saying, I know that house is going to be empty.
It can make your inherited home a real target for criminal activity, so it's always best to secure it as quickly as possible.
What To Do After Inheriting A House
When you inherit a house you need to make a plan to clean out the house and dispose of your loved one’s personal property.
The next thing you're gonna wanna do is figure out what to do with all the stuff inside the house. And how you deal with that stuff is gonna depend on the terms of your parent's estate plan.
If you inherited a house solely and you also inherited all the personal property within the house, then it's relatively straightforward.
You're gonna wanna start cleaning the house out and you wanna make sure you put aside any items of special value. If there are items that are especially valuable, you may need to get them appraised for a state tax or for tax purposes.
If you think they're items that have, particular value, you might want to call in a qualified estate sale team or an appraiser to make sure you know how much those items are actually worth.
If there aren't items of special value, then probably what you're going to be dealing with is either selling all the stuff yourself and taking what you don't want to Goodwill or calling in a qualified estate sale team who can do that job for you.
If your parents left specific personal property to other people, then you need to remember that even though you might have inherited the house, it doesn't mean that you inherited everything in the house.
If there are items that your parents specifically said should go to other people, then you need to make sure that you don't take those yourself and think, oh, I got the house while I get everything in it.
Those items may not belong to you. Again, depending on the terms of your parents will.
What are the tax consequences of inheriting a house?
If you inherit a house through someone's will or through a trust, generally you're gonna get what's called the step up in basis.
And the step up in basis means that instead of inheriting the original cost basis or the purchase price of the person who died, your new cost basis gets stepped up as to the house's value on the person's date of death.
Let’s talk about what this means in practice.
So if your parent bought a house 30 years ago for $100 ,000 and on the day they die, it's worth 1 .5 million.
If they sold it the day before they died, they would owe capital gains taxes on almost $1 .4 million of embedded capital gains.
But if instead of selling it the day before they die, they give it to you through their will, then when you inherit, you can elect what's called to take the step up in basis.
So instead of having their original cost basis of $100 ,000, you have a new cost basis of 1 .5 million. So if you don't want to keep the house, then say you turn around the next day and you want to sell it, you sell it for 1 .5 million, your cost basis is 1 .5 million, you may not be paying any taxes on that.
It is really important to understand the tax treatment when you inherit a house because it can play a huge part in dictating what you want to do with that home.
If you don't get a step up in cost basis because you inherited a house through an irrevocable trust or by a deed transfer, then that might significantly change your calculus of whether you want to keep the house to live in or rent it out or sell
If you do get that step up in cost basis, then you can make a decision about keeping the house, renting it out or selling it free of real concerns about the tax consequences of any of those different options.
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What if you inherit a house with sibling(s) and only one of you wants to sell?
Another really important thing that inheritors need to know when they inherit a house, especially if they inherit a house jointly with siblings, other family members, or whoever it is, is that you cannot force someone to own an asset that they don't want to own.
What does that mean in practice?
It means that if anyone who owns the house wants to sell, they can in most cases force a sale of that house.
Let's consider a situation where you have two siblings and the three of you inherit your parents' house jointly.
Two of the siblings want to keep the house and rent it out and use it as an investment property. But the third sibling doesn't want to deal with it. They think it's too much of a hassle. For whatever reason, they don't want to keep the house. They want to sell.
If you're one of the siblings that wants to keep the house, then you have two options.
The first option is that you and your other sibling can buy out your third sibling's portion of the house. So say the house is worth $600 ,000. You each own a third. So each of your shares is worth $200 ,000. If you and your other sibling can come up with $200 ,000, you can buy your third sibling out of their share. And then you and your remaining sibling can make decisions about keeping, renting, selling the house between the two of you without that third sibling's involved.
But if you don't have the cash to buy your third sibling out, then in the vast majority of cases, they are going to be able to force a sale. This is one of the reasons why it's so important to talk with your parents about how they're going to leave assets after they die.
If your parents had known that in advance of leaving the three of you their house, there was going to be this disagreement and you guys would be fighting over whether you should keep or sell the house, then
they might have decided not to leave it to the three of you equally.
Maybe they could have left it to you and your sibling and they could have left your third sibling who didn't want a piece of that house, some other equivalent asset.
But if you get into this situation, even if you feel really, really strongly emotionally attached to the house, say you have just one other sibling, it's the two of you, you loved your parents' house, you always imagined that you would live in and then you guys inherit that house jointly and you want to live in it, you say, okay, sibling, I'll pay you rent, you know, I'll pay you whatever you want. I'll cover your half of the mortgage, but they just don't want to own that house, then you're going to be in most cases out of luck.
They can force a sale because you can't force someone to own property that they don't want to.
How do you decide if you should keep or sell an inherited house?
The last thing I want to talk about when it comes to inheriting a house is how you decide what you actually want to do with that house. This might be a relatively simple and straightforward decision for you.
It may be that you inherited the house. It's not a place you want to live. It's not a house you want to live in. It's pretty cut and dry that you want to sell the house, take the cash and move on.
It may be that you have an attachment to the house. You're not ready to sell it, but you don't want to live in it yet or maybe ever. And you can start renting that house out as an investment property.
If you decide to keep the house, whether you're going to rent it out as an investment property or live in it yourself, you need to make sure that you can actually afford that.
This isn't just the cost of the mortgage if there is one. This is also property taxes, insurance, and maintaining the house. If your parents house was nicer than the place that you're accustomed to, you want to build in all of the costs of actually maintaining that property.
Maybe you need to have landscapers, maybe you need to have a house cleaner, maybe there's a bunch of deferred maintenance that your parents didn't put into the house.
If your parents died and they still had mortgage payments to make on the house, then it should be really easy for you to figure out what those payments are and to just resume making those payments, especially given where interest rates are today.
That's probably advantageous because it's likely that your parents had a much lower interest rate than the 6%, 7 % mortgage rates that we're seeing right now. So you need to figure out how much you're going to be paying a month for the mortgage, for property tax, for insurance.
I also recommend getting an inspection done of the house, even if you're gonna keep it, to understand the cost of the maintenance associated with the house.
Depending on how your parents took care of the house, it's really common for houses that you inherit after someone died to have a lot of deferred maintenance, because home maintenance is generally not what people are focused on in the last 10, 15 years of their lives.
You could be looking at a maintenance bill that's thousands or tens of thousands of dollars, and you don't want to find that out after you've already made a decision that you want to live in the house. If you're deciding that you want to keep a house, you want to go into that decision with your eyes wide open about what all of the costs of keeping that house are going to be.
Inheriting a house can be life-changing.
It is an incredibly important way that families across the United States have been able to build generational wealth. But if you inherit a house, it doesn't mean that it is an easy thing. And it doesn't mean that you know what to do with the house.
If you've inherited a house and you don't know what to do next, then check out my other posts on this subject. I'll link to them in the show notes below. And if you still can't get your questions answered, shoot me an email at katherine@sunnybranchwealth.com. I'll catch you next week on the podcast.
Let’s take the next step together
Understanding what to do after inheriting a house is not easy. Inheritors can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, you can reach out to Katherine Fox, CFP® and CAP®, a financial planner for inheritors to learn how Sunnybranch can help you
