Of all the things you might inherit, few come with a fuller range of emotions than a family home. Whether you grew up in the house or just visited when you were older, your parents’ home is a big part of who they were.
Just stepping in the front door after their passing may bring sadness, frustration and even confusion. And all those feelings may affect you and your family as you start making decisions about the house and everything it holds. Here are some key things to consider before or after inheriting a house:
Room by Room, Step by Step
A house isn’t just an asset. It’s a collection of memories. So when figuring out what to do with inherited property, the first step in the process–cleaning it out–can be very challenging. Experts suggest you go slowly and carefully, keeping in mind you may still be processing your parents’ death.1 Take breaks to laugh, cry or just take a deep breath.
If there’s a will, you’ll want to pay special attention to any valuables or household items it includes. Even if there isn’t, try checking the items—especially large or valuable ones—for any labels or markings that might state your parents wishes. Otherwise, you can try separating your parents’ belongings into groups like “keep,” “discard” and “donate.”
It also helps to review any paperwork that might help with settling your parents’ estate or managing the house, including utility bills, account statements and business cards. There’s a bit of detective work that goes into getting an estate in order, and every clue might help you get through the process more smoothly.
When A Home Becomes A House
It’s not easy trying to decide in a few weeks or months what will happen to a house that may have been in your family for years. But that’s the next step—figuring out what will happen to the home. (This can be simpler when you’ve inherited a house with no mortgage.)
If you inherited the home with a sibling, you might start with a frank discussion to gauge everyone’s feelings. If only one of you is interested in keeping the house, either to live in or as an investment, you may be able to arrange a simple buyout. One sibling can pay a lump or make monthly payments to the others. In any case, it may make sense to use a family lawyer or another third party who can make sure the terms are clear and fair.2
Reaching An Agreement
If everyone agrees, you could sell or rent out the house together, as business partners. If the rental market is strong, or if you’re inheriting a house that is paid off, it might make sense to lease the house to a reliable tenant. But consider the time and money required to own and operate a rental property. If you go this route, you might look into hiring a professional property manager, which will cost a fee but can save you time, stress and maybe even money in the long run.
Selling a house after the death of a parent is also a common option. Depending on your family’s comfort level and experience, you can decide whether to sell it on your own or with the help of a real estate agent. You might ask your parents’ friends or neighbors if they can recommend one who knows the local market.
If you and your siblings can’t agree on who should own the home or how to divide it, you might seek the advice of an attorney. Sometimes, an unbiased professional can offer ideas you may not have considered.
No One Wants To Talk About Taxes, But…
The last thing you probably want to think about as you grieve the loss of your loved one is taxes. But like any financial consideration, taxes have to be a part of the conversation.
Thankfully, the federal government doesn’t tax inheritances, and only a handful of states do.3 So whether you inherit a car, cash or a house from your parents, you may not owe anything on your next tax return.
Here’s an example: When you inherit a house, the “purchase price” is considered by the IRS to be the market value of the home at the time of the owner’s death. So, if your parents’ house is worth $500,000 when you inherit it, and you sell it 3 months later for $510,000, the IRS considers your earnings to be $10,000—even if your parents bought the house long ago for $150,000. Most states follow the same rules, so you’ll likely owe no tax at all.4 Be sure to check tax laws in your state so there are no surprises.
That said, inheriting a house can come with some tax headaches, depending on the size of your parents’ estate. While there is no federal inheritance tax—a tax on an asset received by an individual taxpayer—there is a federal estate tax, also sometimes known as the “death tax”, which is taken out of the total estate of the deceased person. If your parents’ total estate is in the tens of millions, it could be subject to hefty federal estate taxes.5 And some states have laws that tax even smaller estates.
As you weigh your options after inheriting your parents’ home, consider talking to an accountant who can help you sort through tax issues like these. If you anticipate a big tax bill, it may help to keep some of your new inheritance in your savings account and earmark it for tax season.
In general, there’s a handy rule when you inherit something as significant as a house: Don’t be afraid to ask for help from friends who have gone through it or experts like accountants and lawyers. Many other people have gone through what you’re going through—including the tears, nostalgia and other emotions mixed with a challenging financial decision. If you can lean on their experiences, you might find their advice offers something useful–just when you need it most.
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