Inheriting a property can be an emotionally challenging experience, as it often comes after the loss of a loved one. Stepping into the house may evoke feelings of grief and sorrow. Additionally, dealing with the financial decisions associated with inherited property can be stressful and confusing. It is crucial to understand your options, assess the financial implications, and seek expert assistance to navigate the legal and tax requirements that come with inheriting property.
Understanding the Process of Inheriting Property
So, you’ve inherited a house—now what? What should be your next steps? And what are the tax implications? Let’s delve into the details of what happens when you inherit a house.
Assess Each Room of the Inherited Property
The first step is to meticulously go through each room of the house and clear it out. Inherited property holds sentimental value and cherished memories, which can make the process of de-cluttering and deciding what to keep challenging. Take your time and allow yourself breaks when needed.
If there is a will, pay attention to any specific instructions regarding household items or valuables. Even without a will, it’s worth noting any valuable or significant items and looking for indications of the deceased’s wishes. You may want to categorize the belongings into groups to keep, donate, or discard.
If you come across paperwork, review it to gain insights into managing the home or settling the estate. Relevant documents may include account statements, utility bills, and business cards. Inheriting a property often requires some detective work to organize the estate, so patience is key.
Determining the Need for Repairs
Assessing whether the inherited property requires repairs is crucial for deciding your next steps. The need for repairs can influence your choices. Similar to purchasing a home, it’s advisable to schedule a home inspection after inheriting a property.
If you plan to sell the property, it’s important to be aware of any significant repairs that need attention, such as fixing the roof, foundation, furnace, or windows. If you intend to rent out the property, keep in mind that tenants generally prioritize comfort over the property’s long-term condition, so you may want to consider factors like paint and carpeting as well.
Considering the Tax Implications
Do you need to pay an inheritance tax when you inherit a property? While inheriting property doesn’t automatically trigger a tax liability, the decisions you make regarding the property may have tax implications, such as property taxes or capital gains taxes.
When you inherit property, you may benefit from a step-up in tax basis, meaning you inherit the property at its fair market value. You will only owe taxes on the gains between the date of inheritance and the date of selling the property.
Selling an investment usually incurs capital gains taxes based on the profit earned. However, you don’t need to do a 1031 exchange on an inherited property. In most cases, the step-up in tax basis protects you from substantial capital gains taxes.
It’s advisable to check with your CPA on whether the inherited property may be subject to state taxes. Depending on the size of the estate, you may also need to pay a federal estate tax.
Options for Dealing With Inherited Property
Deciding what to do with your inherited property depends on its physical condition, financial status, and any time constraints you may face. Let’s explore the various options you have when dealing with an inherited house.
Review the Mortgage on Your Inherited Property
The first step is to determine whether there is an outstanding mortgage on the home. Review the mortgage terms and the remaining balance. Inheriting a property with a mortgage can affect your decision to rent or sell the property. Here are some details to consider regarding different mortgage situations:
Reverse mortgage
If the property has a reverse mortgage, which allows older homeowners to access equity without moving, the beneficiary may have a limited time to repay the outstanding amount. You may need to sell the property, obtain a new mortgage in your name, or pay the remaining balance out of pocket.
Due-on-sale clause
This clause states that the loan becomes due if the borrower transfers the home to a non-family member. If this clause exists, you may need to sell the property or pay off the mortgage in full. However, if you inherited the property from a family member, you may be able to assume the mortgage payments.
Mortgage paid by the estate
If the original owner had a mortgage on the property, the estate may have paid it off after their death. In this case, you would own the home without any liability attached.
Underwater property
If the amount owed on the property is higher than its value, it is considered an underwater property. In this situation, you may consider a short sale, which involves accepting less than the remaining loan amount.
You can Move Into the Inherited Property
One option is to move into the inherited property. If there is an outstanding mortgage, you need to consider whether it is financially viable for you to take on that debt. Assess whether the mortgage exceeds the home’s value, if maintenance costs are too high, or if the monthly payments are beyond your means.
If you own the property free and clear without any debt obligations, moving in and selling your previous primary residence could be a viable option. This allows you to keep the inherited property within your family and live in a debt-free home. Moving in may be the right choice if you are the sole inheritor. However, if there are multiple beneficiaries, determining who gets to move in can be more challenging.
You Can Rent the Inherited Property
Another option is to rent out the property. However, be cautious as this choice has its drawbacks. You will be responsible for property upkeep, property taxes, managing vacancies, and potential renovations. While renting can generate profits over time, a significant portion of the funds may need to be reinvested in maintenance.
Renting out the property may also require a substantial commitment of your time and effort, unless you decide to hire a property manager.
Sell the Inherited Property
Selling the property is a common choice among those who inherit a house, especially if they want to make a quick profit. Selling eliminates the need to handle repairs, making it the easiest and fastest option. Cash buyers, in particular, offer a streamlined process and quick closings.
If the inherited property requires extensive repairs and you lack the financial means, time, or experience to address them, selling may be the most suitable option.
1031 Exchange on Inherited Property
While you can execute a 1031 exchange on inherited property, it is not necessary to avoid capital gains taxes. Inheriting a property exempts you from inheriting capital gains tax liabilities or depreciation recapture. The step-up in tax basis allows you to avoid these tax obligations by inheriting the property at its fair market value at the time of the original owner’s passing.
If your intention is to sell the property instead of retaining it, a 1031 exchange may be an option. It is possible to 1031 exchange an investment property into a passive real estate investment. To learn more about your options click here.
About Us and Our Services at IntelliVest Wealth Management
Understanding the intricacies of the 1031 exchange process can be challenging. At IntelliVest Wealth Management, we offer services that make the process more manageable. Our expertise can help you navigate the logistics of a 1031 exchange successfully.
Through our 1031 exchange syndication platform, we simplify the process of finding high-value properties for exchange. By holding partial ownership of an investment property and contributing to investment funds, you can delegate the logistical responsibilities to professional managers. Our services include:
- Step-by-step guidance through the investment process: Once you have decided on your course of action, our team can guide you through the necessary paperwork and assist you in purchasing the investment, ensuring that each step is completed correctly.
- Access to a selection of investment properties: Before making any decisions, you can review the available options and obtain the required documentation and information.
- Recommendation of an exchange intermediary: We can recommend a qualified exchange intermediary who will handle the exchange process. This intermediary plays a crucial role in navigating Section 1031 and assisting you in reinvesting your money by holding the profits from your sale and facilitating the transfer of funds for the acquisition of a new property.
Why Choose IntelliVest Wealth Management
Choosing the right 1031 exchange company for your investment needs is essential to ensure a smooth and stress-free exchange process. At IntelliVest Wealth Management, we offer the following benefits:
- Partial ownership: Enjoy the benefits of investing without the responsibility of property maintenance. With hands-off investments and partial ownership, you can focus your time and energy on other matters.
- Customized service: We provide personalized assistance to help you complete the exchange efficiently and conveniently.
- Diverse DST investments: Our wide selection of Delaware Statutory Trust investments enables you to make well-informed decisions that align with your goals and preferences.
- Professional team members: Our expert team has the necessary experience to navigate regulations and ensure the successful completion of your exchange.
- Accessible resources: If you have any questions or concerns about the process, we are here to provide the answers you need and offer information about the properties you are considering.
IntelliVest Wealth Management can help you simplify and streamline your 1031 exchange experience.
Disclaimer
IntelliVest Wealth Management is a Registered Investment Advisor headquartered in South Carolina. This is not financial advice. If you have questions about your own financial plan