Spark Global Limited Reports:
Inheriting a house can be one of the best gifts you can receive from a loved one or family member. However, receiving such gifts sometimes comes with reasonable cost-sharing and other headaches. This refers specifically to the time and cost of maintaining the property and any taxes that may follow. Of course, the type, location and value of a property can lead to the aforementioned headaches.
Arguably, one of the most common questions on the mind of anyone who inherits money is whether they should keep it or sell it. The best answer to this question is “it depends.” This depends on many things like your target attributes, what are the selling (opportunity) costs and keeping, what types of attributes (commercial, residential or agricultural real estate) the long-term costs of keeping might be associated with any potential revenue that might be brought in, and so on.
After considering these and other related issues or options, it will then be up to the heirs to decide the best way forward, perhaps with the expertise and professional advice of an experienced estate planner.
Inherited wealth: a double-edged sword?
There are many reasons why the blessing of inheritance can be stressful, with some even calling it a “curse.” The problems mainly revolve around the following aspects:
Financial and legal liability: This financial liability primarily includes any debt obligations, such as mortgages, that may be attached to inherited property. Or it might even involve a loan that was acquired and securitised from the property. On the other hand, legal issues or liabilities may involve situations where the property is jointly inherited, for example between siblings, and working together to find a common solution becomes a nightmare.
Tax liability: This may include federal estate and property taxes. Once the property is inherited, the heirs are responsible for paying these taxes. If the property is sold, then capital gains tax may apply.
Maintenance/preservation costs: Inherited property often requires expensive cleaning and repairs before it can be used. For certain types of property, such as a farm or vacation home, such property may also include ongoing maintenance costs. Typically, people inherit a home from a deceased parent, relative or friend, and it has often been used for years or decades. This means having to renovate the house and keep it in good condition, which is never cheap.
What are your options when you inherit the house?
Generally speaking, after inheriting a home, you have three main options for dealing with your estate, and these are:
1. Move into the property
A house that has held many memories over the years often has high sentimental value, especially if the heirs also lived in the house at some point. It is not uncommon for such property to be transferred after inheritance. Children who want to keep their parents’ inheritance, or families with agreements not to sell ancestral property, tend to favor this option.
Note: Keep in mind that you need to make sure the property is in the best condition for you to live in (renovation costs) and moving in May result in an increase in property taxes.
2. Rent out property
Another viable option is to rent out the house. This option is undoubtedly a great way to earn passive rental income while retaining ownership of the property. Despite these benefits, being a landlord is not without responsibilities and costs, such as occasional property repairs and maintenance costs, ongoing property taxes, property insurance payments, and more.