In the days of underwater mortgages and funky home financing, inheriting a house can be as much of a curse as it is a blessing. If you're personally attached to the property -- say you grew up in it or got married there -- it can be difficult to make a logical decision about the best course of action. Most experts recommend selling the house and increasing your personal capital. So even though your emotions are important, you'd be wise to let your finances dictate what you should do with it.
But what if you're not sure what you want to do with your inherited house or even how to begin making that decision? While many people love the idea of inheriting a chest full of antique jewelry, collectibles like classic cars or artwork, or even a long-lost aunt's fortune, figuring out what to do with something as large as a house can take you down a long, bumpy road. On the next page, you'll find some things to think about during your journey.
All in the Family
If you're one of several heirs to the same house, you're going to need to hold a summit before proceeding. Everyone's emotions about the house need to be assessed and dealt with before any business begins. Differences about an inheritance can cause bad blood between even the closest of relatives. These sticky matters can hold up negotiations and decision making, so it's best to get them out of the way first. If one heir wants to buy the house and the others want to sell it, there's always the option of coming up with the money yourself and buying the others out of their share. If you decide as a group to keep it for rental income, you'll essentially be going into business together. So you'll want to consult a lawyer and set up a limited liability company (LLC). This will legally define every member's percentage of ownership in the house, which will help when it comes time to split up income or proceeds from a sale. It's always good to have a lawyer on retainer to help deal with the legalities of group inheritance.
Mi Casa, Su Casa
When you inherit a house, you also inherit all of the financial matters that come along with it. If you're lucky enough to get a house that's paid in full, you'll still have property taxes and maintenance costs to contend with. If you get a house with a mortgage payment or liens on the mortgage, you're in charge of paying those, too. The first thing you need to find out is what the finances of the house are. If the home has a reverse mortgage, you'll only get the actual house if the estate (or you) can pay it off without selling the property. If not, the bank will sell the house to recoup the loan, and you'll inherit the remaining equity. You also have the option of trying to get a regular loan, which you can use to repay the reverse loan. If the house has an upside-down mortgage, you can choose not to open the estate and leave it to the bank to figure out. You'll also want to find out about taxes. Different states have different taxes -- inheritance taxes and estate taxes -- so make sure you get this information before you make your final decision.
What should I do with it?
In order to decide if you should keep the house or sell it, you need to ask yourself some questions. What kind of shape is the house in? For a house in total disrepair, it may be cheaper to tear it down than renovate it. Then, you can try to sell the property it's on. When you inherit a house with good bones and some cosmetic issues, you might want to consider fixing it up to sell or renting it as income property. You may find the house requires extensive renovation that you don't have the time or money to oversee. If this is the case, you may want to sell it as is, even though this may mean accepting a lower price. In this market, there's no guarantee that you would recoup your investment, so it's really up to you to decide what's best for your personal financial situation. Before you decide to keep the house, consider its distance from where you live. If it's too far away, you need to think realistically about how often you can get there and how you'll provide for the house's upkeep. You should familiarize yourself with the area's real estate -- a local realtor may be able to help guide you in the best direction. You definitely need one if you're planning to sell, but a realtor can also let you in on local property values, the house's estimated worth and whether or not it's a good rental candidate. The good news is that deciding to sell means you'll only have to pay capital gains on the difference between the sale price and the house's market value.
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- Hayden, Faith. "Inheriting a house begins with the paperwork." Washington Examiner. Apr. 28, 2010. (Aug. 16, 2010)http://www.washingtonexaminer.com/economy/real-estate/first-time-buyers/Inheriting-a-house-begins-with-the-paperwork-91979319.html
- Kroll, Karen M. "You've inherited a house: Now what?" Bankrate, Inc. May 20, 2004. (Aug. 16, 2010) http://www.bankrate.com/brm/news/real-estate/20040520a1.asp
- Sichelman, Lew. "What to do when you inherit a mortgage problem." MarketWatch, Inc. June 25, 2010. (Aug. 16, 2010) http://www.marketwatch.com/story/what-to-do-when-you-inherit-a-mortgage-problem-2010-06-25
- Toto, Christian. "The inheritance included the house." The Denver Post. July 6, 2008. (Aug. 16, 2010) http://www.denverpost.com/business/ci_9789819
- "You've inherited a House with a Reverse Mortgage -- Now What?" Nethery & Ofseyer, LLP. February, 2007. (Aug. 16, 2010) http://www.ofseyerlaw.com/lawyer-attorney-1180377.html