I Inherited a House. What Can I Do With the Inherited Property?

May 4th, 2021
Homes

Suppose you’ve inherited a house and now you have to figure out what to do with it. Should you move into it and make it your new home? Should you rent it out? Should you sell it? What if there are tenants? Will you have to rehab it and update it before you can sell it?

As soon as you inherited a house, these are some tough decisions you might have to make. In this article, we’ll walk you through many of those decisions and their potential implications. If you decide you don’t want to deal with inherited property and you decide to sell, there are some great options that can help you get a fair price while helping you close quickly.

Option 1: Turn Your Inherited Property Into A Rental

This is a common option many people take when inheriting property. It’s a great option for many because of the potential cash flow it can generate. However, the big question you’ll need to answer is whether you want to become a landlord.

Sometimes, people have a romantic notion of owning and receiving income from real estate, but being a landlord takes work, and some people who inherit property might find they aren’t up to the task. Prepare to ask yourself these questions:

  • Is the home in a desirable neighborhood?
  • Will you need to refinance if there is a mortgage?
  • Will the potential rental income cover any mortgage and taxes?
  • Have you completed an inspection?
  • What upgrades and repairs are needed to attract renters?
  • Have you purchased a landlord’s insurance policy?
  • Have your researched rental prices for comparable properties?
  • Have you created a tenant policy or residential lease agreement?
  • Have you considered hiring a professional property manager?

If you don’t complete these points, you’re putting your property at risk of depreciation. Over time, it can become more difficult to maintain the property and earn rental income, and this could even make it difficult to keep up with the mortgage and taxes. If relations with a tenant devolve, you’re now risking legal battles around eviction and recovering back due rent. For these reasons, most people who inherit property choose other options.

Option 2: Moving Into Inherited Property

For many people who inherit property, this may be their first thought. The house you are inheriting might be an upgrade compared to your current dwelling, or it might have sentimental value. Moving in and taking over your inherited property is a great option, but make sure you consider several points before taking up residence:

  • Is there an outstanding mortgage? This will be your responsibility and you need to make sure your budget can support the payments. The mortgage should be around 25% of your net household income. You will have some wiggle room with that number, but it is a safe benchmark that will help with financial health.
  • Can your budget support the expenses? The expenses that come with any inherited home are property taxes, insurance, utilities, potential repairs, and general upkeep. Does your current cash flow support these expenses?
  • How does it compare to your current home? If the land is larger, the yard duties will be more costly and time consuming. If the home is bigger, utilities might be significant more than you are used to paying. These are just a couple of points of comparison to consider.
  • Are you aware of potential repairs? We definitely recommend getting an inspection done on the property just like you would if purchasing a new home. This will give you a checklist of repairs needed. Add in potential upgrades as well in this cost list.
  • Is the inherited home in a suitable location? Based on work situations or family needs, think about whether the new property will fit your work, home, and social life.

Inherited property living expenses

Option 3: Turning Inherited Property into a Vacation Home

Sometimes, inherited property gets used as a secondary or vacation home. The location may not be ideal for you to make the inherited home into your primary home, but it might work as a vacation home.

The biggest decision with vacation homes and secondary dwellings comes down to cost. What will it cost to keep the home? Is there a mortgage? What are the monthly utility and maintenance costs? Is rental income available for certain portions of the year, and how will you manage it? Make sure you are aware of all the potential repairs and financial details of the property.

If the numbers don’t work out for you to keep it, selling the property one option if the property is in a desirable area, even if some repairs are needed. Vacation homes are always in high demand, and you might be able to sell the home fast if you can find the right buyer.

Other Difficulties When Inheriting Property

Multiple Family Members Inheriting

Oftentimes, you’re not alone in inheriting the property. You may have siblings or other relatives who have a claim to the property. This has the potential to complicate things, and communication is key as all parties involved must be willing to compromise.

When multiple parties are involved, then selling the inherited property may be one of the best decisions as the assets can be divided equally among everyone. One party may want the house, while everyone else may want to sell or use the house as a rental. If this is the case, they can buy out the house from the other parties involved. You can also rent and split the profits; however more people involved makes for thinner profits, and someone must be responsible with managing the property.

Repairs to an Inherited Property

Sometimes, an inherited home may need extensive repairs or upgrades. Imagine a home that hasn’t been updated since the 1970’s or 1980’s. There’s wood paneling on the walls and shag carpet. The toilets are leaking and you discover damage in some flooring and the walls. The foundation is cracked in places. The home might be technically liveable, but there has been some neglect that needs to be addressed. Whether you want to occupy, rent, or sell the home, you will have to sink some money into the home to make it livable first.

Inherited property repairs

Inherited property often requires repairs to make the home liveable.

Inspections Are a Necessity

Treat it like you are buying it and get an inspection. This will give you a checklist of items needed to be done to the home. You will have a scope of work and projected price tag on the projects. Knowing these items will help you decide whether to rehab or sell it. Even if the repairs are too costly or overwhelming, there are plenty of avenues to sell the property. At least you know what your costs are going to be and decisions needed to be made.

Mortgages on Inherited Homes

Several times throughout the article we have mentioned the potential of inheriting a property with a mortgage. The dream of inheriting property would be a perfect house with no outstanding debt. Unfortunately, inherited properties often come with mortgages. In the extreme case, the property may be behind on its mortgage obligations, or the property might be underwater.

If the property is still carrying a mortgage, the inheritor is responsible for assuming the mortgage and paying off the balance. Sometimes, the outstanding principal can be substantial, and this might force you into selling the inherited property.

If you are looking at a large lump sum of mortgage debt, what should you do? Thankfully there are options:

  1. Refinance the mortgage. This frees you from the current payment structure and allows you to change the term like you would on a traditional home mortgage.
  2. Use other assets to pay off the property. Many times the deceased will have assets like stocks, bonds, or cash that can be used to clear any debt.
  3. Decline to accept the property. In this case, the house goes back to the bank through the foreclosure process, but you lose control of any memorable assets in the property. You may have another relative willing to take over the mortgage.
  4. Sell the property. If refinancing the property is not an option, this may be the simplest way to handle the mortgage debt while allowing you some control of the process.

Due-on-Sale Clause

Be aware of this potential clause in a mortgage agreement. There may be terms within the mortgage that require the outstanding mortgage be immediately paid in full at the time of the decedent’s death. If so, this issue must be resolved immediately upon inheriting the property. If not paid in a timely manner, the clause allows the lender to foreclose on the mortgage loan.

If this is your situation, don’t panic, because federal relief may be available. Federal law provides some protection to individuals who may not want to take ownership of a home with an outstanding mortgage. In 2018, the Consumer Financial Protection Bureau enacted a rule to protect family members who inherit a home with a mortgage. Under this rule, lenders must offer the inheritors the ability for a modification of the terms to the original mortgage.

If you find yourself, in this situation, you should consult with legal counsel helping you handle the estate.

Consider the Tax Implications of Inherited Property

You may be wondering if you will have to pay taxes on the property. The good news is that the act of inheriting a property doesn’t trigger any immediate liability. What you decide to do with the property will determine what type of tax liability you may have.

The value of the property you inherited counts as part of the total value of the estate. If you are the executor of the will you must make sure all taxes and debts have been paid before you can divide the assets. Because this value is so important, having a thorough market analysis of the property is important.

Work with a trusted real estate professional to help you create that analysis. This does not have to be a real estate agent. You can find an appraiser or even work with an investor who can connect you with his team of people to do a proper assessment. Having this market analysis will help you provide accurate information to your legal counsel and accountant.

Beyond any property tax owed, if you decide to sell or rent the property, you will pay capital gains taxes on any profit you make on the property. You may decide to keep the home as a primary or secondary residence because the mortgage is paid. There will still be continuing property tax expenses that should be considered before this option is considered. In California, if you decide to keep the property as a rental, there are tax deductions that potentially will work in your favor. Any expenditures you make toward the rental property can be deducted as long as you are not using a property manager to oversee the place for you.

Inherited property taxes

When you Inherit property, you also inherit any property taxes.

Selling Your Inherited Property

People who inherit property often don’t have the time and energy needed to make repairs. Sometimes, margins are so thin and cash flow is limited, so repairs and upkeep quickly become a burden. For some people, selling the inherited property is the fastest and easiest way out.

Selling an inherited property can be difficult, but not for the reasons you imagine. Most people who inherit property struggle with the emotional ties they have to the house. This causes people to postpone making any decisions. It’s difficult saying goodbye to a home that has potential memories. If selling is an option, there is no immediate rush, but eventually you have to consider the option.

Here are reasons you should consider putting the property up for sell:

Multiple Owners

If multiple people have inherited the property, selling the property may be the only way to disburse the asset equitably.

Overwhelming Repairs

The thought of rehabbing a home could be overwhelming. Don’t despair. There are many investors in every market looking for homes they can remodel and add to their portfolio. The positive aspect of selling to an investor is that it is quick and there’s no need to go through a traditional real estate transaction with realtors.

Geographically Undesirable

Some people don’t think of this, but the property you inherit might be in another state. Maintaining and managing the property from such a long distance takes plenty of time, effort, and money. Selling is a good option in this situation.

You Can’t Afford the Mortgage or Upkeep

Not all inherited property comes free and clear. Many inherited homes still have mortgages that you will need to pay. Can you take on that financial burden? If not then selling is a perfect solution. If selling the property is a potential option there are unique obligations that come with inherited property:

  • You may need to wait for a probate court to settle the estate
  • You will need to distribute personal items per the will and potentially hold an estate sale
  • You need to continue to pay the mortgage, property taxes, insurance, and utilities
  • Understand how to report the proceeds of the sale when filing taxes

Making a Final Decision on Inherited Property

Inheriting property can be sudden and unexpected, and you may not be prepared for all the decisions you need to make. Even if expected, the fog of emotions hampers easy decision making. We’ve given you many options to consider and several checklists to work through as you decide what to do with your property.

If you decide to sell, we can help and make the process quick and painless. If you need a market assessment our team can work through the comparables in the area and provide you an analysis you can use when finalizing the estate. We also have a team of contractors, and can give you a fair price on what expected repairs on the house may be. We often close deals in 7 days.

SleeveUp Homes has been in the rental property business for years, and we know how to avoid foreclosure, especially if you’re a distressed homeowner who is behind on mortgage payments. We’re not realtors or wholesalers, we buy direct from you and give you the fairest possible price for your property. If you don’t want to go through the process of selling your home on your own, or you need to avoid foreclosure, SleeveUp Homes can help. We buy and rehab homes directly from homeowners, and we perform any repairs required to get a home into sale condition. We cut out the realtors and wholesalers so that we can pay top dollar for your house regardless of its condition.

If you’re ready to sell your home for a fair price without the hassle, contact us today to get an offer.