Figuring out what to do with a home you just inherited can present a lot of issues, both monetary and emotional. Below are three options to consider when a house suddenly becomes yours:
Live in it
This option is pretty self-explanatory. If you inherit a home, you can always just move in and make it your primary residence.
The biggest benefit of moving into an inherited home is time. You’ll have time to decide what you ultimately want to do with the property: stay in the home long-term, rent it, or sell it. You’ll also have time to sort through all of the individual’s belongings, which can be invaluable if you inherited the house from a parent or close relative.
A potential downside to moving into an inherited home is if the house needs extensive repairs. Moving into a house that requires major renovation or updating can not only be expensive but also stressful. In addition to the cost of repairs, you’ll also need to consider the cost of ownership. Property taxes, homeowner’s insurance, and all of the other costs associated with homeownership may not fit into your budget.
One more thing to consider is taxes. If you decide to make the home you just inherited your primary residence, and you plan on staying in the house for longer than two years (of the last five years prior to the sale date), then you can avoid capital gains taxes ($250,000 for single filers, $500,000 if you’re married or filing jointly). Otherwise, you may be on the hook for a large tax bill (more on that a little later).
An inherited home could provide a means to generate some passive income!
As stated above, the biggest benefit is the passive income. And, if you live nearby, you can keep costs low by acting as the property manager. Another benefit is that you can deduct a certain percentage of the property’s value each year, which will reduce your taxable rental income. You can also depreciate improvements that either add value or extend the property’s life.
The downside to renting out your inherited house is that you have to become a landlord. You’ll have to market the property to find tenants, deal with problem tenants, and you’ll be responsible for any maintenance or repair issues. Additionally, the catch to all of the tax benefits I explained in the previous paragraph is that you have to pay back that depreciation to the IRS if you sell; meaning your capital gains taxes will be higher. Also, since the property isn’t your principal residence, you won’t qualify for the capital gains exclusions (see above, $250,000 for single filers, $500,000 if you’re married or filing jointly).
Sell the house
Like the first option, this one is pretty self-explanatory. If you’re not interested in living in the home or renting it out, sell it. If the home is in good shape then your best option is to list the home using a reputable real estate agent. If the house requires some repairs or is completely outdated, you can sell it for cash to an investor.
The benefit of this option is you receive cash, less the remaining mortgage balance, if there is any, taxes, and any real estate commissions.
The downside to this option is you’ll be forced to go through everything in the home fairly quickly; unless you want the additional costs of holding on to a vacant property (e.g. property taxes, maintenance, insurance, etc.) This may not seem like a daunting task, but keep in mind you’ll probably be going through a lifetime of things that carry significant emotional value.
As far as taxes, beneficiaries receive a stepped-up basis, which means capital gains taxes are based off of the fair market value of the home at the time you took ownership, not what the individual you inherited the home from actually paid for the house.
*I’m not a lawyer or a tax professional so please consult a professional before deciding what to do :).