When you inherit a house, there are many options to pursue when it comes to the management of the property. When asking yourself, should I sell my inherited house or rent it out, there are numerous factors to consider to help you identify which option will provide you with the best advantages in terms of financial security, legal responsibilities, and physical upkeep.
You can opt to live in the house and pay its mortgage or you may choose to sell or rent the house to another party.
In this guide, we’ll walk you through the ins and outs of selling vs renting your inherited house and explore alternative solutions like a home buy-back program to managing your inherited property.
Selling an Inherited House
If you already own a home, you may not want the responsibility of a second property. As such, the first option many people consider is when inheriting a house is to sell it.
Should I Sell My Inherited House? Things to Consider
If you’re deciding if you should sell your inherited house, there are several things to consider before you list it. Some key considerations include:
- Other heirs – If you’re the sole heir of the property, it’s yours to do what you wish with it. However, if there are multiple heirs, you’ll all need to come to an agreement about whether or not to sell the home. This can lead to some tough conversations if heirs have different ideas about how to handle the inherited property.
- Emotional value – Whether or not you’re the sole heir, the property may have strong emotional associations for you. Maybe it’s the house where you grew up or your grandparents’ home where you spent every Christmas. When considering selling, you’ll have to determine if you want to let go of this little piece of your history before you put it on the market.
- Property condition – Outside of emotional attachments, there are practical things to consider as well. First, what condition is the home in? Does it need a significant number of repairs before it can be sold? If so, you’ll need to factor in the costs for repairs and remodels.
- Existing mortgage – If you’ve inherited a house with no mortgage, you don’t have to worry about settling an existing mortgage. But what happens if you inherit a house with a mortgage? If money is still owed on a mortgage, that amount will have to be deducted from your proceeds when you sell the home. Furthermore, you’ll have to make payments on the mortgage until the sale goes through to prevent foreclosure.
- Possible liens – Finally, any liens or debts, attached to a home remain with the property even after the owner passes away. This means you inherit any overdue property taxes, contractor payments, and other debts. You’ll need to settle these and clear the property’s title before you can sell the home.
Pros of Selling an Inherited Home
If you’re deciding if you should sell your inherited house or inherited land, there are several distinct advantages. Some of the biggest pros of selling your inherited house include:
- You’re freed from any responsibility for the home
- You can make a significant amount of money off the property sale
- Cash from the sale can be used for other purposes, such as debts or tuition
To that end, deciding to sell an inherited house is the best option for many people.
Cons Wehn You Sell an Inherited House
Even if you decide to sell your inherited house, you should also be aware of the potential downsides. The biggest disadvantages typically associated with selling an inherited home are financial.
That’s because any money you make off the home sale may be subject to a capital gains tax.
Capital gains tax is calculated as the difference between the property’s current fair market value and the amount of money the property is sold for. So, if you inherit a home that’s assessed at $300,000 and you sell it for $400,000, you have to pay capital gains tax on the $100,000 difference.
You also have to pay for any fees associated with selling the home, repairs, and existing debts. If you don’t have the money in hand before you sell the property, you might have to take out a loan just to sell the inherited house.
Renting Out an Inherited House
Maybe you’re not ready to sell the inherited house but you also don’t want it to sit empty while you pay for the real estate tax and upkeep. Instead, you can decide to rent it out and earn a little extra income.
Considerations for Renting an Inherited House
Before you post your rental listing and start bringing in those rent checks, there are several considerations to take into account when choosing to rent instead of sell your inherited house. These include:
- Dealing with tenants – As a landlord, your responsibility is to answer tenant calls at any (and all) times of the day. Any problems at the property are also yours to handle. If a tenant doesn’t pay you on time or damages the home, you’ll have to track them down for payment or go through the trouble of evicting them.
- Maintaining the home – Even though you aren’t living in the home, you’re still responsible for the maintenance and upkeep. Fixing major issues like a roof leak, burst pipe, or electrical problem can be very expensive and will eat away at your rent profits.
- Recording rental income for tax purposes – The money you earn from your tenants is considered taxable income. You can deduct some of the maintenance expenses but you’re responsible for keeping tabs on all of the necessary paperwork for tax filing season.
- Paying property taxes – Lastly, you also have to pay the home’s property taxes every year. Depending on where the home is located, this can be a considerable amount of money that ends up deducted from your rent collection proceeds.
Pros of Renting Instead of Selling an Inherited House
Once you’ve taken all of these points into consideration and decided to rent instead of sell an inherited house, you can also reap several advantages.
Some key reasons why people prefer to rent out rather than sell an inherited house include:
- You receive some extra monthly income that can provide a solid financial boost
- You can keep the home in the family while still easing some of the financial burden
- You can choose who you rent the property to
- You can always sell the home at a later date if renting it doesn’t meet your expectations
- A portion of the income from your tenants may be tax-deductible
Cons of Renting an Inherited Home
Similar to the disadvantages of choosing to sell an inherited house, you may experience financial roadblocks when renting out a house, which include:
- You’re responsible for property maintenance and repairs
- You still need to pay property taxes annually
- You have to purchase and maintain an insurance policy on the home
- Tenants don’t always pay rent on time or at all
Along with these potential financial downsides, as a landlord, you must be available to your renters 24/7 or pay to hire an outside real estate property management company to deal with tenant issues.
Alternative Options If You Don’t Want to Sell an Inherited Home
If selling or renting isn’t the right choice for you right now, several alternative options exist. These include the following:
- Live in the home – Maybe you’d prefer to live in the home for a few years instead of sell the inherited home right away. If the home is your primary residence for at least two years, you might earn further capital gains tax benefits when you do decide to sell.
- Let other heirs buy you out – Are there any other heirs or family members involved that have strong feelings about what should be done with the property? You can offer them the chance to buy you out. This provides you with some cash and freedom from the burden of owning another property.
- Buy yourself more time – For the best of both worlds, a sale-leaseback solution frees you from the home’s mortgage, allows you to convert the equity to cash, and provides time to consider your next steps. And once you sell the inherited house, you can live in the house for as long as you want.
Sale-Leaseback: The Alternative Solution for Inherited Properties
You generally have three options: rent, live in it as a permanent residence, or sell the inherited house. However, when you rent, live in, or sell an inherited home, there are often considerable financial costs that you may not be prepared for.
Rather than renting or selling your inherited house, you can partner with a sale-leaseback program.
A sale-leaseback solution allows you to sell your inherited house and convert the equity to cash. You’ll then have the option to stay in the house as a renter, hand off the property to list on the open market, or repurchase the home once your finances are in order.
Talk to a financial advisor today to explore the ins and outs of selling vs renting your inherited house and explore alternative solutions like a home buy-back program to managing your inherited property.
- TurboTax. Real Estate Tax and Rental Property. https://turbotax.intuit.com/tax-tips/rental-property/real-estate-tax-and-rental-property/L3e09vT71
- IRS.gov. Gifts and Inheritances. https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritances