Inheriting your parent’s house is essentially being handed the keys to your childhood. It’s not just a property; it’s a vault filled with cherished memories and emotions. If you don’t plan to inherit your parent’s house, it’s time to make one.
More than 75% of parents plan to leave home to their children when they die, according to a 2023 Charles Schwab survey. Do you know what you’ll do if you’re named the heir of your childhood home? You could sell the inherited property, rent it, or keep it, but if you have siblings, you’ll need to come to a mutual agreement before taking any action.
To help you navigate a complicated and emotional process, we’ve outlined the common mistakes people make when inheriting a home and how to steer clear of them.
When a parent’s house is transferred to a child, and sentimental feelings are involved, you may overlook the option to sell the property. The Charles Schwab survey reported that almost 70% of those who expect to inherit a home from their parents plan to sell it.
Selling a house can be the right financial move, especially if the home has high upfront costs or is valued highly on the market. Create a budget to cover the costs of selling the home, such as real estate agent fees, staging costs, and prepping the house for selling.
Inheriting a property may also come with taxes and a mortgage, so you’ll need to consider whether you can afford the transfer. Roughly 37% of people die with mortgage debt, and heirs are required to continue making payments after transferring ownership of the loan if they want to avoid foreclosure.
What’s more, some states impose an inheritance tax ranging from 0% to 18%, depending on your relationship with the deceased. Children usually qualify for the 0% tax rate, but more distant family members are subject to a higher tax.
The states that currently impose an inheritance tax include:
If you decide to sell the house, you will likely be subject to capital gains tax — taxes you pay on the difference between the sale price and the property’s value at the time of inheritance.
No matter how you decide to proceed with the inherited home, you could face an uphill battle if you don’t have a plan in place to afford it.
Transferring ownership of property from parent to child is rarely a straightforward or simple process. Consulting with professionals can help you avoid legal, tax, and financial issues down the line. Here’s who you can talk to:
Inheriting a house with siblings requires constant communication and getting every family member on the same page. Making the most of the inheritance will get tricky if you and your siblings are divided on the next steps. Ultimately, you should make decisions on maintaining the property, splitting the costs, and dividing profits collectively.
If you’re at a crossroads, consider bringing in a mediator who can help facilitate these conversations as a neutral advisor. Any terms you agree on need to be in writing and notarized.
For example, if you don’t plan on using the house as a primary residence, your family may consider joint ownership outlined by tenancy in common or joint tenancy terms. Both options have pros and cons, and a real estate expert can help steer you in the right direction for you and your family.
While navigating the emotional toll of losing a loved one, you might feel pressure to make decisions quickly. However, it’s important to weigh your options carefully to ensure you make a responsible choice that sets you up now and in the future.
There is no universal time limit on selling inherited property, but how long you wait to offload it could affect how much you pay in capital gains taxes. In fact, holding the property for more than a year can qualify for long-term capital gains rates, which are generally lower than short-term rates. Use this time to move through probate intentionally and analyze the housing market to make the most of selling an inherited property.
What can you do with a house you inherit? Whether you live in it, sell it, or rent it out, it’s important to consider the financial implications of each option:
Since the start of the pandemic, single-family rents have increased by more than 40%, proving that long-term rentals are great ways to provide supplementary income. However, being a landlord comes with significant responsibilities and challenges.
For one, you’ll have to learn to handle tenant issues and make routine repairs. If you decide to hire a property management professional, you’ll typically pay the firm between 8% and 12% of the rental income.
You’ll also have to keep up with local rental laws and navigate the tax obligations of a rental property. Vetting tenants properly and keeping up with maintenance can also help protect your investment.
If the inherited property is in a desirable location, turning it into a vacation rental can be a brilliant investment. But you’ll also need to consider the costs of insurance, property taxes, and regular upkeep to determine whether a profit is possible.
To determine whether these expenses are worth it, think about how often you or other tenants will use the property — and how you’ll maintain it. Depending on your preferences, you may decide to hire a rental service to handle maintenance and repairs, oversee bookings, and respond to guest concerns.
If you can afford it, moving into the home you inherit could be an option. You can sell your existing home or turn it into a rental. Keep in mind that living in a house you inherit is not always possible (or ideal) if the home comes with high upkeep costs, such as property tax, insurance, and other maintenance expenses.
Federal laws require lenders to allow you to assume the mortgage if you inherit a property, and you may be able to add your name to the mortgage without having to requalify for it.
Inheriting a parent’s house is like a choose-your-own-adventure. There are so many routes you can take, but not all of them are the best choice for you and your family. It’s easy to get swept up in sentiments or make rushed decisions, so take the time to weigh all your options and consider consulting with a real estate or legal professional to help guide you.
With a process as complex as inheriting a parent’s house, it’s natural to have questions. We’ve answered a few of the most common questions below.
There are many ways you can inherit a home. This includes transferring ownership of property from parent to child before death by selling the home to you for fair market value or gifting the property using a trust.
Using a transfer on death deed, parents can designate their children as beneficiaries of their home upon death, and typically avoid the probate process. However, not all states allow transfer of deeds.
No, there is not a legal time limit on selling an inherited property. However, if you sell the asset within one year of transfer, you’ll be subject to short-term capital gains taxes, which are higher than long-term capital gains taxes.
Also, remember that the probate process can take six months to several years or more if your parent’s passed without a trust or will.
This is certainly a tricky situation, and finding a solution will require open and honest communication. If you cannot reach a mutual agreement, you might consider enlisting the help of a professional mediator.
Another option is considering a partition action, which allows you to proceed with the sale of an inherited property, even if one or more parties disagree. Here, the sale of the inherited property is split between siblings.
What you do with an inherited property is an individual decision. While renting can provide a nice stream of supplementary income, it also comes with landlord responsibilities and fees. Selling can provide you with cash you can invest elsewhere, but you’ll need to budget for capital gains taxes.
Consider the property’s condition, the local market, and how hands-on you want to be before deciding. Chatting with a financial planner can also help you weigh the pros and cons.
