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What to Do When You Inherit a House

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Inheriting a house can bring financial opportunities and obligations, depending on your plans for the property. For those inheriting a house that is paid off, the absence of a mortgage can be an advantage, but expenses like property taxes, upkeep, and potential capital gains taxes still apply. If multiple heirs are involved, reaching an agreement on whether to sell, rent, or keep the home may require discussion or legal guidance. Evaluating the home’s market value, whether there’s a mortgage, as well as the tax implications of inheriting it, can help determine the best course of action.

If you have questions about the specifics of your financial situation, you may even want to talk to a financial advisor about it.

What You Can Do When You Inherit a House

Inheriting a house can be both a gift and a challenge, offering opportunities as well as important decisions to make. Whether the property holds sentimental value, represents a financial asset, or comes with complex legal and emotional considerations, understanding your options is key. Each choice involves weighing factors such as taxes, market conditions, and your circumstances. Here’s a general breakdown of what each choice means:

  • Occupying the home means it will stay in the family, which can be appealing if there are memories connected with the property. If there is no mortgage, this can be an economical option as well.
  • Selling the home provides immediate cash, assuming it is worth more than the mortgage after necessary repairs. This can be a relatively quick and easy way to make the most of a home inheritance without adding any future risks.
  • Renting a home can provide passive income and even some tax advantages. However, becoming a landlord involves costs and coping with tenants can require a lot of time and attention.

Inheriting a House That Is Paid Off

If the home is paid off and has no mortgage, there may still be significant financial considerations if the home needs costly repairs before it can be sold or occupied. Ongoing costs for property taxes, utilities, residential insurance, maintenance costs and any homeowner association assessments, also need to be factored in.

If multiple heirs inherit the home, they must decide whether to keep, sell, or rent it. One heir may buy out the others, or the group may agree to sell and split the proceeds. Additionally, if the house has appreciated significantly in value, capital gains tax considerations may come into play if it is later sold.

Exploring estate planning strategies, such as placing the home in a trust or gifting it before death, can also be useful for those looking to reduce tax exposure and simplify the inheritance process.

Inheriting a House That Has a Mortgage

Inherit a House

If the home has a mortgage, the need to keep making monthly payments has to be considered. Most mortgages can simply be taken over by the heirs. However, if there is a reverse mortgage, a type of home loan available to seniors ages 62 and older, the ownership of the home will transfer to the mortgage company when the owner dies.

Another issue arises if the house is underwater, with a mortgage balance that exceeds the home’s value. In that case, the new owners may be able to convince the lender to do a short sale, selling the property for less than the loan balance and accepting that amount to settle the debt.

Managing Taxes When You Inherit a House

Inheriting a house doesn’t usually trigger any tax liabilities by itself. There is no federal inheritance tax, although larger estates may have to pay federal estate taxes. Five states impose an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.

In all of these states, a spouse is exempt from paying inheritance tax. Children and grandchildren are exempt from inheritance tax in each of the states except for Pennsylvania and Nebraska. Exemptions vary by state for siblings, aunts, uncles and in-laws. You will likely face higher inheritance tax rates if you aren’t related to the deceased.

Capital Gains Tax

Capital gains taxes may come into play if the heir or heirs choose to sell the house. Capital gains taxes are federal taxes on profits gained from the sale of assets. Short-term capital gains taxes apply on sale of assets owned for a year or less. Long-term capital gains taxes are levied on sale of assets owned for more than a year.

The short-term capital gains tax rate is the same as the taxpayer’s ordinary income tax rate. That is, from 10% to 37% depending on income bracket. Long-term capital gains taxes can be 0%, 15% or 20% depending on income and filing status.

One more wrinkle in the capital gains tax applies if the heir occupies the home as their primary residence for at least two out of five years. Then the IRS may grant an exclusion of up to $500,000 on capital gains taxes for a couple filing jointly or $250,000 for a single filer.

Step-up-in Basis

When a house is transferred via inheritance, the value of the house is stepped up to its fair market value at the time it was transferred, according to the IRS. This means that a home purchased many years ago is valued at its current market value for capital gains purposes

For example, a home purchased in 1990 for $80,000 that’s then valued at $400,000 when it’s inherited in 2025 will be stepped up in value to the latter. If an heir sells it for $400,000, no capital gains tax will be owed since the price is not more than the stepped-up value, meaning no profit was made. However, if the heir sells it for $425,000, capital gains tax will be owed on the $25,000 difference between the sale price and the stepped-up value.

Emotional and Relationship Issues

Inheriting a home that has been in the family for a long time can bring emotional and relationship issues to the surface. If multiple heirs were each bequeathed part ownership, it could be challenging to sort out what everyone wants and choose a mutually acceptable course of action.

If one person wants to live in the home, he or she may buy out the ownership interests of the other heirs. But if the house is sold, it can be relatively simple to divide up the proceeds among multiple heirs. If renting the property, heirs can agree to split the income after expenses

Heirs often involve a third party such as a family attorney to facilitate discussions and ensure that everyone understands the agreement. Whatever agreement is made, it will normally be put in writing to avoid future misunderstandings.

Bottom Line

Inherit a House

Inheriting a house can be a financial windfall as well as a way to keep the place of treasured memories in the family. However, there are a number of tax, financial and emotional considerations to keep in mind when deciding what to do. Much will depend on the size of the mortgage, the home’s value and the costs of upkeep. The issue of taxes should also be carefully studied.

Home Inheritance Tips

  • If you’ve inherited a home, consider consulting a financial advisor before deciding on a course of action. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • In case you are facing a capital gains tax from selling an inherited residence, use a free capital gains tax calculator to get a good idea of what you owe.

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