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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 strong one.

"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.

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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 loan.

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.

-- Posted: May 20, 2004
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