Unlike other forms of inheritance, a property can be quite the hassle to be passed on. While the blessing remains there, properties can come with legal, financial, and tax implications that add to the complexity of the situation. Before making a decision, it’s wise to analyze the situation and weigh all your options. There are three main things you’ll have to consider: the tax implications, the legal and financial responsibilities, and what you want to do with the house. The only catch is that these three points are closely dependent on each other.
For the sake of simplicity, we’ll discuss the three scenarios you have for dealing with the house: keeping it, selling it, or renting it. Let’s explore these scenarios in more detail.
Moving into the House
Your first option is to keep the house, whether you’ll be moving into it or just keep it for future use. This can be simple in case you’re the sole inheritor, but it can get a bit complicated if your siblings inherited the property with you. If, after coming to a mutual decision, you decide to move into the house, you’ll have a checklist to go through. Here’s how your checklist would go:
- If the house is still mortgaged, you’ll have to decide whether you’re willing to carry the debt. Make sure to get the financials right; the mortgage may be more than the property’s value and the interest may break your bank.
- Consider the state of the property and if it’s good enough for living. If it requires a lot of maintenance and upgrades, make sure it’s worth the investment.
- Consider the details of accommodation if you’ll be sharing it with your siblings.
If the property is fully owned and you won’t have to worry about any debt or financial investment, then moving into the house can be your best option. Not only does the property hold precious memories for you, but it can expand your options greatly. If anything, you can sell your current residence or end your lease and move into your newly-owned property.
In comparison with the other options, keeping the property will pose the least tax implications for you. You can even exploit the right to being excluded from capital gains in case you decide to sell the property down the road. To qualify for capital gains exclusion, you’ll have to satisfy two main conditions:
- To have lived in the property, as the primary location of residence, for 2 out of 5 years at the very least.
- To not have used the rights for capital gains exclusion on any other property, throughout a duration of two years preceding the selling of the property.
Legal and Financial Responsibilities
Obviously, you’ll also inherit any current debt along with the property. This goes for the current mortgage, tax payment, and property insurance. Make sure to check the mortgage contract as well, since some contracts dictate that the remaining debt has to be settled first in case the property is sold or the original owner passes away.
Selling the House
Selling the property can be a difficult decision to reach, but there are many situations where it’s the most rational and practical choice. When it comes to multiple inheritors, outstanding debt, and overwhelming maintenance needs, selling the property can definitely be the best outcome. Not only will you get the value of the inheritance in cash, which is much more versatile, but you’ll also avoid dealing with the financial and legal repercussions of owning a house.
While it can provide immediate cash, selling the house can be far from easy. This is especially true if you’re looking to sell a hoarder house and you have no idea what to do with the stuff. After all, potential homebuyers will only be interested in homes that appeal to them; once they can visualize themselves living in. Under those circumstances, you may want to search for a real estate agency that’s willing to buy the property for its actual value.
The largest tax implications come with this scenario. Unless you sell the house for the fair market value (FMV) that’s been set at the time of the inheritance, you’ll be liable to tax implications for selling the house at a higher value. This could result in either long or short-term capital gains, so make sure you’re well-aware of the results of your actions.
Legal and Financial Responsibilities
You’ll have to settle any outstanding debts before using the profit you’ve made.
Renting the House
Finally, you can always opt for renting the house. Unless you have experience in real estate and renting a property, this option can be overwhelming. This is especially true if the property needs maintenance or upgrades. However, you’ll be able to enjoy several tax deductions in renting an owned property. And since this is an owned property, you’ll still be responsible for the legal implications. You’ll also have the added responsibility of being a landlord, which can get complicated.
If you’ve just inherited a property, but you’re unsure of what to do, then you have three main options. You can move into the house, sell it, or rent it. Make sure to study the tax implications and legal and financial responsibilities before you make your decision.