Inheriting a property is an emotional time. Knowing what your options can help you make an informed decision on how to move forward.
Whether it be a parent, grandparent or other family member, you will more than likely not be the recipient of a property you inherit. Deciding on what to do with the property can present both emotional as well as financial issues. If you have siblings, the situation may be arduous as conflict can arise.
Weighing all the options
Whether or not you were expecting this property as an inheritance, you must decide what comes next. Do you fix the property up and sell it? Do you sell the property as is? Should you keep it and rent it out? Is the property worth keeping as a future investment? Let’s delve deeper into each situation, but first you should speak to an expert such as an estate attorney and tax advisor.
Get some advice from experts
It would be a great idea to speak with an estate or probate attorney, tax advisor, and a financial planner. They can help update you on the status of the property and verify your ownership, inform you about tax information, and help guide you to a financial plan.
In Minnesota, residents are subject to an estate tax for estates of more than $1.6 million (rising to $2M by 2018). The tax falls on the estate of the deceased owner. The beneficiaries inherit what remains.
Minnesota does not have an inheritance tax, which means the tax that falls onto the heirs/beneficiaries; not the estate of the person who is deceased. The maximum estate tax in Minnesota is 16%, which compared to the federal rate of 40% is significantly lower. These taxes also fall onto the estate and not the parties inheriting the property.
There is an exemption of $5 million, which is indexed to inflation and is currently $5,450,000. What this means is people with estates larger than the exemption amount must pay the estate tax. By estimates on .14% of Americans will be subject to an estate tax, although this is a rare occasion.
In short, if both amounts fall under the $1.6M ($2M by 2018) locally and $5,450,000 federally, there will not be an estate tax paid in Minnesota. Because inherited property is not considered ordinary income, the beneficiaries do not have to pay income tax.
Fix it up and sell
This can be the step where emotions take over. Depending on whose home you inherited, there can be a tremendous amount of sentimental value. But on the flip side, selling it can take a potential burden off your hands; you could end up making money on the transaction.
Depending on how the home has been maintained over the years, there might not be a lot of maintenance to be performed. In most cases, updating will be needed, which means investing time and money into the property. Hiring a home inspector can be beneficial to determine a list of necessary fixes. This may include a new roof, water heater, HVAC, or damage/deterioration rot to the exterior or interior of the home.
Consult with a real estate agent who is familiar with the area to give you style tips on what sell. They can suggest relatively cheap things like updating lights, paint color, and flooring to give even an outdated home a fresh look.
Once the property sells and a profit is made, capital gains tax can come into play. Capital gains tax is tax owed on the amount of an asset that is sold for more than it is purchased for. Beneficiaries receive what is called a “stepped-up basis,” which is the property’s fair market value at the date of the previous owner’s death, as opposed to when it was originally purchased. When a home sells, you only pay taxes on gains over that amount which is currently around 20% depending on your current tax bracket.
Sell the property “As Is”
Some people don’t have the time or extra money to be able to make the necessary repairs or updates to increase the property’s value. In cases like these, the homes will be sold “as is.” That simply means the sellers aren’t making any repairs/updates to the home. Buyers can still request an inspection, and based on the results can still back out of the agreement.
Heirs of the property will usually go in and clean out more personal belongings and leave all the furniture items to be sold along with the property. Options like these are usually targets of developers or flippers who will get a house for a lower rate, put the work in and then usually turn a profit when they sell the property.
Renting out the property
Depending on the situation, keeping the house and renting it out can be a great option. A major benefit of this option is keeping the home and keeping the sentimental memories close to your heart. Another benefit is homes that are inherited are fully paid off or have a low balance left and renting it out can provide a bonus cash stream.
Alternatively, you instantly become a landlord. That means another property that you will be responsible for repairs, dealing with tenants, collecting payments and paying bills, and plenty of other scenarios.
The city where the house is located usually has rules regarding rentals that are needed to be followed. This can include permits and city inspections. It can be a rewarding and profitable option, but be sure you know what the responsibilities are before you go the route of renting out the home.
Moving and living into the property
A lot of homes that are inherited are paid off or have a minimal amount of money owed on them. If you are currently paying a mortgage on your own home, having a housing option where you can live mortgage free would be a very appealing option.
If you are the sole heir to the property, this can be a good option. If other heirs are included on the inheritance it could make the situation more challenging. One of the other inheritors may be expecting to move into the house. A buyout option or paying rent to remaining heirs would have to be negotiated before deciding to move in.
If the home is paid off, all you will need to worry about is paying the property taxes every year. In some circumstances, the property taxes might increase. Some states give a discount to senior citizens on their property taxes. In Minnesota, some seniors are eligible for property tax assistance through their property tax referral program. Otherwise seniors can be eligible for other tax breaks, especially if they live somewhere else in the country for parts of the year.
The home can be worth more if you were able to benefit from the stepped-up value. If the inherited property becomes your principal residence, you can eventually qualify for the capital gains exclusion. That means if you sell the property after inhabiting the residence, you can pocket the profit (up to $250,000 for single filers and $500,000 if you’re married and filing jointly) without owing capital gains taxes. You must live in the house for at least two of the last five years prior to the sale date.
Refusing the inheritance
There are cases where the home inherited is not paid off or in good standing. Taxes and liens combined with an outstanding mortgage leave the property in question underwater. There isn’t enough in the life insurance policy, savings or investments to cover all the costs of the home. You will owe on the property that you are inheriting.
All the heirs are all responsible for paying off those debts before you can claim the house as your own. In cases like these you have an out on the situation.
You do have an option to refuse the inheritance of the home. The executor can handle the creditors and let the house go back bank and into foreclosure.
There are steps to take to complete this process. Legalzoom.com breaks down the steps as following:
- Create a document, heading it “Disclaimer.” IRS rules require that you prepare and execute this document within nine months of the death of the person who made the bequest. If you miss the deadline, the property automatically becomes a personal asset for income tax purposes.
- Complete the disclaimer by using language to the effect that you are unconditionally disclaiming property bequeathed to you in a will. Identify the will by date and author; identify the property by address and/or legal property identification number. You may not direct ownership to another person; by law, the contingent beneficiary will gain ownership.
- Sign and date the disclaimer. You may not execute a disclaimer before the death of the testator — the person who wrote the will. In addition, you may disclaim a portion, and not all, of an inheritance. Have the disclaimer witnessed and notarized by a notary public, who is authorized by law to witness your signature.
- File the disclaimer in the local court handling the probate case, if the estate is going through probate, and send it to the executor of the estate via certified mail. If the property was bequeathed to you in a trust, and the estate is avoiding probate, send the disclaimer to the trustee via certified mail. The trustee is the individual handling the estate and the bequests; he has the responsibility to oversee the transfer of assets to the beneficiaries.
Choose your path on your inherited property
While it can be an emotional time inheriting a home, there are several options which have. Whether you sell the property or decide to keep it to either rent it out or live in it, there are pros and cons to each option. Take the time to weigh out each option and see what benefits you and/or other heirs that are involved.
Get advice from experts like estate lawyers, tax advisors, and real estate agents. They can provide valuable information that will help you determine outstanding balances, how taxes on the properties affect the estate and heirs, and give you market tips if you decide to sell.
If you find yourself in this situation and are deciding if you want to keep the property or sell, fill out the form on our contact us page. We can provide a free property evaluation and offer suggestions that will assist you in selling the home once the time comes.