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Inherited Real Estate Property

Inherited Real Estate Property Considerations

For most people, the greatest financial asset they leave behind is real estate. Real estate is a lifetime investment and serves as a vehicle to pass down wealth to future generations. While the process of purchasing and maintaining real estate is hard work, deciding what to do with that real estate also becomes hard work for those who inherit it. There is a myriad of factors that must be considered in the decision-making, such as emotional ties, family dynamics, and financials. These are all considerations you must look at when receiving inherited real estate property.

Even though there are countless considerations that may influence one’s decision, there remain three basic decisions to be made when it comes to real estate: sell it, rent it, or move in. There is no one-size-fits-all answer as to which is the correct decision for you. You must take into account the aerial view of the situation.

Although the following is not an exhaustive list, these are some of the more important items to consider: joint owners, existing mortgages/liens against the property, the present physical condition of the property, and everyone’s favorite – taxes.

Joint Owners

Did you inherit the property with siblings that have equal ownership rights? If so, it is important you all have a discussion to gauge what everyone has in mind for the property. One sibling may want to keep the home, while another may want to simply sell it and split the proceeds. This can become very difficult very quickly if everyone is not on the same page. While the one who wants to retain the property could buy out the others, it may not be feasible for that sibling to due to money. Perhaps the house could be refinanced and the other siblings can be paid from the proceeds of the refinance, or you could possibly arrange for some sort of payment plan. What is important is to try and reach an amicable decision, even if that means consulting with a third-party mediator rather than reverting to seek court action.

Mortgages/Liens

Is the property owned free-and-clear? Or is there an outstanding mortgage on the property? Do you know what kind of mortgage it is? Is it a regular 15-30 year mortgage or a credit-line mortgage? Is it a reverse mortgage? Are there judgments against the property? Are the mortgage or tax payments in arrears? In the cases a regular mortgage exists, some estate plans call for the mortgage to be paid off by the estate, but if there are not enough assets, or the estate planning instrument does not call for it, you will have to assume the monthly mortgage payments. This may or may not be sustainable given your own financial situation. In the scenario of a reverse mortgage, you do not have the option of simply assuming monthly payments even if it were feasible. Instead, you would have to pay the balance in full in a rather short time period. If there are any judgments against the property, they will have to be satisfied. If payments are in arrears, it may not be feasible to bring them current. Many of the above scenarios may lead to a decision to sell the house in order to salvage whatever equity may remain.

Physical Condition

Is the house in good repair? Or does it still have the same kitchen from the ‘80s, with paneled walls, a baby-pink bathroom, and a 20-year-old roof? While the latter may seem funny, it is very common for homes to be outdated or in dire need of repairs. If this is the case, you must assess how significant the repairs are and whether it is something you believe is worth fixing on your own. While it may not fetch the highest price, selling the property in its current condition will save you the time, headache, and expense to try and coordinate and manage a renovation. It is necessary to consult with licensed contractors and realtors to understand the scope/cost of repairs, and what the current market value of the property is in both its current condition and the after repair value. This will aid you in determining whether it is worth making the investment. On the other hand, if the house is in relatively good shape, it could be ideal for a rental property, assuming you are able to manage the asset. Again, consulting with a licensed realtor will help you understand the local rental market so you may properly analyze your situation.

Maintenance

This is something that must be considered with all of the above. Despite all other circumstances, the property must be maintained. That includes assuming all the carrying costs such as homeowners’ insurance, utilities, and taxes. Be sure to transfer the insurance and utility bills to the new owners and make sure all payments are made on time. Sometimes high carrying costs alone may be incentive enough to sell a property if it is not sustainable. However, if the carrying costs are reasonable and the house is prime for a rental property, it is worth considering maintaining the property as a rental so the tenant could set-off, or entirely cover the carrying costs while producing a passive income stream.

Taxes

Most people cringe or shudder at the thought of the word “taxes”, however in the realm of inheriting real estate, there could be some great tax advantages. One such advantage is the step-up in basis. Example: If your parents bought a home 30 years ago for $100,000 and today’s market values the home at $400,000, you will get a step-up in basis from the original cost of the house to the present market value of the house. In other words, if you were to sell the house now at the current market value, you would not incur any capital gains tax. To take it a step further, if you decided to sell it 10 years from now and the then-value of the property increased to $600,000, your basis in the property remains the $400,000 from when you inherited the property. If you retained the property as a rental home, you would pay capital gains on $200,000 instead of $500,000 had you not had the step-up in basis. Presuming you made the home your primary residence and lived there for two consecutive years prior to the sale, you would be entitled to exclude $250,000 in gains ($500,000 per married couple), thus you would not incur any capital gains from the sale.

As previously stated, there are several important factors to consider when deciding how to handle inherited real estate property. It is a lot easier to review the above in the abstract, but it fails to consider the emotional weight that comes along with it. Thus, it is important to take your time before making any decisions. Communicate with your family and consult professionals to make sure you understand all available options and what ramifications they have. If you are currently in need of assistance, call our firm to speak to one of our experienced team members for guidance.

Tommaso Marasco

Russo Law Group, P.C.
100 Quentin Roosevelt Blvd., Suite 102
Garden City, NY 11530
800-680-1717

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