Inheriting a home can bring a wave of emotions. You’ve recently lost someone that was very close and dear to you. You’re now responsible for one of their most prized assets, and on top of it all, you have a lot of new information to process.
While it may feel tempting to push off talk about taxes, estates, and mortgages for a different day, what you do now will have a critical impact on your own future.
Read more about what you can and should do once you inherit a house so that the next move you make can be the best way to honor your loved one and protect yourself.
Inheriting a home is generally not taxable unless your inheritance meets certain requirements.
For example, at a federal tax level, there is no inheritance tax, and only a select number of states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) require the heirs of a property to pay a tax on anything they inherit.
Furthermore, estates valued at over $10 - 12 million may be subject to an estate tax. However, these are generally paid by the estate itself and not the beneficiaries.
Therefore, inheriting a home only becomes taxable based on what you ultimately decide to do with it.
When you inherit a home, there are four main things that you can do.
#1 - Move-in
You can decide to move into the home and make it your own. An inherited house can be a great primary residence or even a second home. In doing so, you get the benefit of a new place to live that you might not otherwise be able to buy. However, moving in brings with it the cost of taking over the existing property taxes, repairs, and insurance.
#2 - Rent it out
Renting an inherited home can be another excellent option that enables you to earn income passively, keeps the property in the family, and builds further generational wealth. The only downside to this is you will take on the role of becoming a landlord. Managing repairs, collecting rents, and addressing tenant complaints can be quite burdensome, especially if you are not in the area or out of state.
#3 - Sell the home
If the home you inherit is in good condition and requires little to no repairs, selling it can be a viable option. You’ll be able to evenly distribute proceeds among beneficiaries and avoid uncomfortable family dynamics of deciding what to do with the property.
You will, however, be subject to a capital gains tax on the proceeds. Fortunately, capital gains on an inherited property are calculated as the difference between the sales price and the home's value on the day it was inherited (as opposed to the sales price and the original purchase price).
For example, let’s imagine you sell a home for $250,000 that you inherited from your great aunt. She originally purchased it in 1955 for $75,000. Assuming it was valued at $200,000 on the date of the transfer, you’re only liable for a capital gains tax on $50,000 as opposed to $175,000.
#4 - Donate the home
In a situation where a property requires significant repairs or the heirs want to avoid a capital gains tax altogether, you also have the additional option to donate the inherited home to charity.
With the help of organizations like Giving Property, the proceeds from the sale will be distributed to an eligible nonprofit of your choice. In exchange, you will receive tax deductions that can offset your income.
This can be an excellent choice for those looking to honor the memory of those who passed, while also conveying the best tax benefits.
If you inherit property with a mortgage, your choices do change slightly.
Most mortgages have what is called a ‘due on sale’ clause, which requires full repayment of the underlying loan whenever the property is transferred out of the original owner’s name.
Therefore, before deciding what to do, contact the lender of the existing mortgage, and see if they’ll allow you to assume it. This would allow you to put it into your own name and let you make the payments instead.
If they do, then you have a chance to keep the property as your new home or rental. However, if they confirm that the loan is due no matter what and you’re unable to qualify for a new mortgage to replace it, you’ll have to lean heavily into selling or donating the property.
Donating an inherited home often brings immediate relief and fulfillment for donors. Early on in our work, we were contacted by a donor who had inherited his father’s motorcycle repair shop in Michigan. He was living out of state and unable to make the repeated trips required to oversee the sale of the property. The property also needed thousands of dollars in repairs, which the donor did not have.
After carefully weighing his options, the son decided the best way to honor his father’s memory was to donate the property to Michigan Radio, his father’s favorite radio station. Through our expert real estate team, we secured a buyer and helped raise $50,000 for the nonprofit to produce more of the programming that his father loved.
If you and your family have inherited a property and would like similar guidance on donating it, contact us at 844-277-HOME or fill out our form .