Inheriting a house from a loved one provides you with a chance to hold onto cherished childhood memories and bolster your financial security.
However, once you’ve inherited a house, there are several financial and legal responsibilities you’ll need to take care of before you can decide how you wish to use the home.
Luckily, we’re here to help. This guide will walk you through what to do if you inherit a house, including financial factors you need to consider and how to determine the future of the real property.
What Happens After Inheriting a House?
So what happens after inheriting a house? When you inherit a loved one’s home, you don’t just acquire an additional piece of real property—you also gain a few new financial responsibilities.
Every situation is different, but you might find yourself in charge of:
- Mortgage payments
- Insurance costs
- Outstanding debts
- Stakeholder relationships
Let’s break down each of the components that come with inheriting a house.
In the United States, there isn’t a federal inheritance tax. This means you aren’t likely to have to pay any federal taxes on an inherited house. However, if you live in one of the following states, you might be responsible for paying a state-mandated inheritance tax:
- New Jersey
However, only in Pennsylvania and Nebraska are children and grandchildren responsible for paying estate tax on inherited property. Other states tax siblings, in-laws, and other familial relationships differently. Additionally, if you aren’t related to the deceased, you may pay more in taxes.
Along with a potential inheritance tax, you’ll be responsible for paying the annual property taxes after inheriting a house.
2. Mortgage Payments
Have you inherited a house with no mortgage or does the inherited home still have a mortgage? If so, what happens if you inherit a house with a mortgage? You’ll be responsible for taking over the payments. In many situations, you can just make payments on the existing mortgage. However, if the existing mortgage terms aren’t favorable, you may want to consider refinancing.
Along with mortgage payments, you might be responsible for other monthly costs after inheriting a home, including:
- HOA fees
Whether or not you can take on these additional financial burdens depends on your financial situation and preferences.
Checking on the home insurance policy is one of the first things you must do. That’s because you won’t want to let the policy lapse or have an accident occur while the policy isn’t in effect. As such, you should navigate insurance to-dos soon as possible:
- Contact the insurance company
- Update the policy to include your information
- Check to ensure that coverage is sufficient for the property
Checking this task off of your list as soon as possible after inheriting a house will help protect you from any potential liability or loss in the event of a disaster.
4. Outstanding Debts
One unfortunate part of inheriting a house is that you also inherit any debts attached to the home. This can include some unexpected costs, such as:
- A second mortgage
- Liens on the title
- Unpaid contractor bills
As the new property owner, you’ll now be responsible for these debts. If you aren’t in a financial position to be able to pay, you may need to consult a financial advisor to determine the best plan of action.
5. Stakeholder Relationships
Lastly, inheriting a house often involves navigating close personal relationships as well as financial obligations. Perhaps you and your siblings inherit your parents’ home together, and one of you may want to keep the property while the others want to sell it.
In cases where there are multiple heirs, you’ll have to determine which option works best for everyone. In these circumstances, you may want to consider the following solutions:
- One heir buys the others out and remains in the home
- The property is sold and profits are split equally
- All heirs agree to split the profits of renting out the property
Fortunately, there are many guides on how to refinance an inherited property to buy out heirs. However, it’s important to remember that everyone doesn’t have the same emotional response after inheriting a house. Even though you might love the home, your brother or sister might not feel the same way. Being kind to one another and keeping an open ear to everyone’s feelings can help preserve your relationships while you navigate what to do with the property.
4 Options to Consider If You Inherit a House
Now that you know the stakes involved, let’s discuss what to do after inheriting a house. Generally speaking, there are four options to pursue.
1. Move Into the House
Suddenly you look around and realize I’m inheriting a house. Depending on where the property is located and your current situation, your best choice might be to move in. Some of the benefits of moving into an inherited property might include:
- You get to keep the property in the family
- You can enjoy a place special to your family’s history
- If there isn’t a mortgage, you might save a significant amount of money
If this situation is right for your family, it can be a nice way to get on track financially while having a place to call home. You’ll save on mortgage payments and have a home of your own at the same time.
2. Sell the Property
If living in the home isn’t an option, you might decide to sell the house after inheriting it instead. However, you might be wondering should I sell my inherited house? You might not need the extra property or may want to use the profits from the sale to upgrade your existing house. When you sell a house after inheriting it, you should be aware of these potential financial consequences:
- Capital gains tax – When you inherit a home, the fair market value is assessed based on the current market. This means if the property you inherit is valued at $300,000 today and you sell it for $375,000, you’ll be responsible for paying capital gains tax on $75,000. There are some ways to avoid paying capital gains tax in certain situations, such as living in it for two years before selling it.
- Closing costs – Selling an inherited house can come with some pretty steep costs. You might find yourself with a bill for real estate agent commissions, transfer tax, title insurance, prorated property taxes, and other closing costs. While most of these fees can be deducted from the sale profit, they can put a significant chuck in what you receive from the transaction.
- Repairs to the home – Finally, you might need to make repairs to the property before you sell it. If the home has areas badly in need of TLC, it may benefit you to invest in some upgrades to improve the home’s value. In other cases, some buyers might include specific repair requests in their purchase agreement
3. Rent Out the Property
Another option you can consider is renting out the house after inheriting it. This can be one way of holding onto the home while also earning a little extra money. Keep in mind that there may be unexpected expenses associated with owning a rental property, including:
- Taxes on rental income
- Repairs to the home
- Maintenance fees
- Property taxes
You’ll need to weigh the amount of income you’d make from renting the house after inheriting it with the costs of maintaining it to determine if this is a wise option for your situation. You’ll also need to consider whether you have the capacity to be the primary point of contact for your renters and handle repairs or maintenance issues as they arise.
4. Consider Alternatives
Maybe you need a little bit of time to decide what to do after inheriting a house. However, you don’t want the burden of owning an extra home hanging over you while you consider your options.
One alternative is a sale-leaseback, also known as a home buy-back program, which allows you to sell your home and stay in the home temporarily.
Then, you can choose from several options, including:
- Living in the home and paying rent
- Converting the equity in the home to cash to use for other expenses
- Renting until you decide to sell your home
- Repurchasing the home with a new mortgage at terms that work for your situation
Our solutions are designed to help you make informed decisions about what is best for you and your family. Inheriting a house doesn’t have to be a burden—a sale-leaseback can help to lighten the load.
Inheriting a House and Peace of Mind
Inheriting a house can be a wonderful gift, especially if the property contains special memories for you and your family. However, there are also numerous responsibilities that come with inheriting a home.
As the new owner, you’re responsible for navigating the financial and physical aspects of the property and you may come to decide that selling or renting the property is better for you and your family in the long run.
If you’re considering selling after inheriting a house, think about a sale-leaseback. Sale-leaseback solutions can help convert the home equity into cash, and allow you to stay in the home as a renter.
After inheriting a house and are trying to decide what to do next, consider all your options and talk to a financial advisor to determine what the right choice is for you.
- AARP. States with Estate and Inheritance Taxes. https://www.aarp.org/money/taxes/info-2020/states-with-estate-inheritance-taxes.html
- IRS.gov. Topic No. 701 Sale of Your Home. https://www.irs.gov/taxtopics/tc701