Families need different services when it comes to either keeping the inherited house, renting it or selling it. Let’s explore your options.
The will may specify what needs to be done with the house and it may be an easier choice. At other times, the will states the executor has the authority to do as they see fit. Your probate attorney can help interpret the legal language written in the will. In the case of no will, the disposition of the house is determined by the state probate legislative code. Be sure to check out the probate codes at the bottom of this blog.
Since the house is split between everyone involved, everyone should come to a consensus. Jot down what everyone wants to do, preferably in writing with everyone’s initials or signature or O.K. email or whatever is best for you and your family.
Option #1, if everyone has decided to keep the house.
If your family has decided to keep the house, determine if it is better to assume the existing mortgage. Assuming the mortgage allows you to retain ownership without having to secure a new loan, it also carries specific legal and financial responsibilities. There is an act that was created to help heirs assume the mortgage. Garn-St. Germain Depository Institutions Act of 1982 (Garn-St. Germain Act).
Option #2, if everyone has decided to rent the house.
This is a good option if everyone is on the same page with what is needed to rent the house and how the responsibilities will be divided.
If you keep the house for many years, there may be capital gains tax implications. This is due to cost and stepped-up basis. The cost is simply the original price of the house. The basis of inherited property is the fair market value of the property at the time of death of the homeowner. IRS code 1014 allows the cost basis to be raised or stepped up to the market value of the property as of the date of the homeowner’s passing.
Let’s pull some numbers out of the air in an attempt to make sense of capital gains tax (references are shown below). Let’s say Mom and Dad bought the house for $100,000 forty years ago. When they pass, let’s say the fair market value is $600,000. The basis of the inherited property is $600,000. According to the Tax Foundation, the capital gain amount would be zero if the house is sold for $600,00 in the immediate timeframe.
However, say you keep the house for 10 years. The cost remains at $100,000. The basis of the inherited property remains at the fair market value of $600,000 (value at the time of the death of the homeowner). In ten years, the house sells for $1M. The capital gains tax will be the difference between the market value at the time of death and the sold price. In this scenario, the capital gains tax would be $400,000.
It is best to consult with a Tax Professional to get clear direction. I am not a tax expert so this is not to be taken as tax advice.
The third option is to sell the house. Do any of the family members have an interest in buying their share from the other family members? And, if so, how much should one of the family members pay for the house? You can start with the court-appointed referee’s appraised value. Or, if there is a loan involved, the lender will hire a bank appraiser to appraise the property. Or you can call me if one of the family members wants to buy their share of the house.
The third option is to sell the house in the open market. This involves assessing the house’s condition. There are three general categories the house condition can fall into. First, a house is distressed, the second category the house is in showcase condition, and, the third category; the house is in between distressed and showcase. Most houses fall into the third category, a house in between distressed and showcase.
A distressed house is defined as a good functioning house but has an outdated layout and old HVAC, the Roof has only a few years of life, the Electrical is out of modern code, and/or the Plumbing is rusted with tree roots growing in the plumbing. It will need a lot of work beyond cosmetics to bring it up to date. Painting the house, or replacing the carpet will be a waste of your money.
The best advice I can give if you want to sell a distressed house is to expose it to as many potential buyers as possible both investors and DIY Do It Yourself owner-occupied buyers. The price an investor is willing to pay may be less than a DIY Do It Yourself owner-occupant. The investor has to take into account the cost of money and the cost involved in selling the house after remodeling.
The showcase house is completely updated. This is an easy decision. The only thing you need to do is decide on the right price which is a good problem to have! I can help with this, too.
Most houses fall into the third category whereby the house condition is somewhere in between distressed and showcase. This is a house with at least 10 years of life on the roof and HVAC and the interior has been upgraded within the past 10 – 15 years.
For this category of house, you should sit down and discuss a customized marketing solution to your needs. Ask yourself, is it more important to sell quickly or to sell at the highest price? When I ask families what they want, they always say, I want both! I have to ask them to think about this question. It may take at least 6 weeks to do upgrades, most likely several months, or even years.
Now, the final option and the worst one. I always feel sorry for Personal Representatives when they have to choose the fourth option. This option is to walk away from the house. This is a situation when there is no equity in the house. The debts due are greater than the market value of the house. All buyers no matter what, will pay the fair market value of the house. It is best to talk with a real estate attorney about what to do in this case. Many attorneys have no-cost consultations.
I have a handout for you to help you make the decision. Please leave a comment or contact me for this handout. It is easy to follow and it will be easier to make a decision.
Here is the IRS Code:
https://bit.ly/BasisInheritedProperty
And here is the IRS publication:
https://www.irs.gov/forms-pubs/about-publication-559
Here is the link to the Tax Foundation Step Up in Basis
https://bit.ly/StepUp-InBasis
Here is a link to the State of California Probate Codes:
https://bit.ly/ProbCodeLetters
