You've inherited a house: Now what? -- Page 2
Before embarking on an all-out renovation, assess
whether it will be worth your investment of time and money. Do you
have the time and energy to oversee a renovation? If not, selling
"as is" may make sense. "It may be worth taking a lower
price. Life is short," says Weagley.
In addition, you may be unlikely to recoup the cost
of a major renovation in the sale price. To find out if that's likely
to be the case, bring in a professional real estate agent who can
assess whether the market will support it, Weagley adds.
Often, it's best to sell the home and take the proceeds. That's
especially true if the market in which the home is located is a
"If you liquidate the property, you have capital
you can deploy where you think it's best," says Stephen Thode,
director of the Goodman Center for Real Estate Studies at Lehigh
University in Bethlehem, Pa.
If you decide to sell, and you need to do so from
a distance, hire a trusted real estate agent to handle the transaction.
"Hire someone with a good track record who can
get a good, fair market value for the house," says Genevia
Fulbright, CPA, vice president and marketing director with Fulbright
& Fulbright CPA, PA in Durham, N.C.
When you sell a home you've inherited, your cost basis
-- that is, the value of the house used to calculate any capital
gains tax you may have to pay -- is the market value of the property
on the day you inherit it.
Say your parents built the house for $40,000 in 1960,
and it's worth $350,000 when you inherit it. When you receive title,
your "basis" on the house for tax purposes is $350,000,
so if you sell it for that amount you have no gain to report to
the IRS -- that is, unless the property is included in the estate
and there's an estate-tax consideration.
On the other hand, you sell the house for $400,000
a year after inheriting it. You'll pay taxes on the $50,000 profit,
less any fees, between the value of the house when you inherited
it, and the value when you sold it.
No matter how soon you sell the house after you've
inherited it, any gain or loss is treated as long-term for tax purposes,
says Alexandra Miller, CPA, PC, in Tucson, Ariz., and president
of the American Woman's Society of Certified Public Accountants.
"You can sell it two days after you get it, but it still is
treated as a long-term gain," she says. (The tax authorities
generally don't recognize losses on sales of residential property.)
All in the family
If you decide to keep the house, a couple of considerations
come into play. First, if the house was left to you and your siblings,
someone may need to buy out the others' shares in order to keep
it. Unless you have readily available cash, you'll need to get a
One option that will allow everyone in the family
to retain ownership in the house is to set up a family limited liability
company, or LLC. A limited liability company allows each heir to
own a clearly defined percentage interest in the house. This can
make it easier to sell that specific percentage later on. For federal
income tax purposes, an LLC can be either a partnership or a corporation.
In addition, an LLC limits personal liability for
the debts and actions of the company.
"If someone decides to sue the business, they
can not sue the individual partners unless certain circumstances
occur," says Fulbright.
Another option is to keep the house, but rent it out.
But think carefully. "Managing property is not something a
lot of people are adept at doing," says Thode.
You have to make sure the property is continually
rented to responsible tenants, and that day-to-day maintenance and
repairs are handled. And, if you don't live near the home, you'll
need to hire a trustworthy person or property management firm to
handle these chores. Paying for these services, obviously, will
cut into the rental proceeds from the property.
Avoiding future problems
If you've already inherited a house, there isn't much you can
do except choose between these options. However, you can take steps
to minimize the risk that, in the future, any property you leave
behind creates strains for your loved ones.
First, think through any reverberations that might
occur if you were to leave a property to more than one person. "It's
an unbelievable nightmare when children jointly inherit property,"
says Shirley of Financial Development Corporation in Atlanta.
One solution is to stipulate in your will that the
property be sold and the proceeds distributed to your children,
says Thode of Lehigh University.
Whatever you decide, you'll want talk with your children
about your intentions, and also ask for their input. Discussing who will receive what when a loved one passes away isn't
easy. Bringing up these topics ahead of time allows everyone a chance
to thoughtfully consider the situation. It also provides time for
both parents and children to come to grips with the fact that it
may be best for everyone to let go of a beloved home or property.
Karen M. Kroll is a freelance writer
based in Minnesota.