06/24/21

Real Estate Insights

Ins and Outs of Inheriting Property

If you’ve recently inherited a property, you’re probably feeling a little overwhelmed right now. Lots of decisions need to be made. Will you sell, buy, or move in yourself? Are you ready to say goodbye to a property that has likely held sentimental value? Are you up for the stress of a property sale while grieving? What’s next?

The next steps can be intimidating.

There are three main points to consider:

1. Taxes
2. Financial/ legal
3. What to do with the home

1.   Paying Taxes

There’s no Federal inheritance tax. States can put in place their inheritance tax if they choose. But luckily, Wisconsin does not have one. If you’ve inherited property in a different state, check this list of states with inheritance tax.

But even in states where inheritance tax doesn’t exist, you still need to be careful of capital gains tax if you sell the home with gains beyond the fair market value.

There are ways to avoid paying capital gains that you should confirm with your accountant, but one way would be to use the home as your primary residence for 2 out of 5 years of ownership.  This is called capital gains exclusion. If you’re open to moving your primary residence, this can be a strategy to consider seriously. Capital gains tax in Wisconsin is a whopping 7.65%. Check here for a list of capital gains tax by state.

2.   Financial and Legal

Inheriting property can be life-changing for your financial position. Or it can carry an enormous weight on your shoulders. There are a few factors that control the situation:

The condition of the property

You should complete a thorough inspection before making any big decisions. Even if the property still looks cosmetically pristine. Make sure to inspect the foundation, roof, electrical, and HVAC too. Carefully consider all the costs of a renovation before breaking ground.

Required ongoing maintenance and bills

How costly is ongoing maintenance for the home? You can evaluate this in terms of monetary cost and the price of your time. For example, say you’ve inherited a house with acreage. How much of your time will be spent mowing the lawn, assessing dead trees, or maintaining landscaping? If the roof is still in good condition, how long until they need to be replaced?

Making decisions with several other people

Does anyone out there have five siblings? If you’ve inherited the property with more than one person, things can get a little complicated. Sometimes siblings are on different pages. One of you may not be able to part with the home just yet, while another just wants to sell the place and be done with it. Tread carefully on how you communicate. It’s an emotional time. No matter how much the property is worth, it’s not worth dissolving close relationships.

Any existing debt associated with the house – including mortgage

If there are existing debts on the property (like an outstanding mortgage), they must still be paid. Usually, the mortgage is simply taken over by the heirs. But sometimes, a reverse mortgage is in place.

What the heck does that mean?

These types of mortgages are only available for a specific demographic. You must be over the age of 62. A reverse mortgage allows a homeowner to cash in on their home’s equity without actually selling the place. It’s a way for retirees to supplement their monthly income. It can bean excellent option for retirees, but it usually means that their heirs will receive less inheritance.

If you’ve inherited a property with a reverse mortgage, typically the debt is required to be settled upon inheriting the property.

This isn’t quite as scary as it sounds. Usually, it just means that you’re required to sell the property. Then you’ll pay the debts with the income earned from the sale.

3.   Now what to do with the house.

We’ll make things easy for you. You just have three options: move-in, sell, rent.

Moving in

If the home you’ve inherited is an upgrade to your current living situation, it can be tempting to move in yourself. But first, consider if the outstanding debt and responsibilities make financial sense for you.

If there is no outstanding mortgage, but the cost of keeping the lights on is 1k/ month, and you’re used to paying 300/month that may not work for you either. And don’t forget that you’re still liable for taxes, insurance, and maintenance.

Selling

Selling can be the best option, especially if multiple heirs are involved. Sell the property immediately and split any profit. A few things to consider are closing costs and realtor costs, if anything needs to be done to fix it up before selling. And, of course, as we discussed before… the dreaded capital gains tax.

Once it’s sold you’re out. The burden has been lifted. You have no ongoing responsibilities. Does thinking about this make you feel a little lighter on your feet? If so, this may be the right course of action for you.

Renting

Renting can be a great way to receive passive income. But it can also be a burden. You must find the right tenant. You must make sure the lease is done correctly. And that both landlord and tenant rights are respected. And you’ll probably have to do more regular maintenance on the place. At the very least, deep cleaning, patching holes, and painting in between tenants.

Ask for Help

We know this is a sensitive time. We hope this guide has been a good starting point for you. If you’re feeling overwhelmed, or have any other questions at all, we’d be honored to support you during this time. Feel free to reach out with questions any time.