What To Do When You Inherit Property
One of the most common types of inheritance is the family home. When the time comes, a lot of decisions will need to be made. We break those decisions down into three simple options to help you make it through the process smoothly.
For most, selling the home is the most straightforward of all options especially if there are multiple parties inheriting the home. Even if the home has been held for a considerable time and has a large amount of appreciation, there is usually little to no tax associated with the sale of the home. Upon the death of the parents, the beneficiaries get a “step-up” in cost basis effectively eliminating any capital gains. After paying off the remaining mortgage, commissions, and other closing costs, the proceeds can then be split among the beneficiaries.
Sometimes people prefer to keep the property. Maybe there are sentimental reasons to keep it in the family. If there are multiple beneficiaries this can be a more complicated strategy. Often the individual who is planning on living in the property will negotiate a buyout with the rest of the beneficiaries. Property taxes are likely to increase on an inheritance due to a step-up in valuation, however, if there are any capital gains in the future, they can fall under the capital gains exclusion for a primary residence.
The last of our three main options is to rent it out. This option is very similar to renting any other rental property. A great way to shield rental income is to depreciate the asset from the new step-up valuation. If there are multiple beneficiaries, usually one takes primary responsibility and it is not uncommon for them to receive extra compensation for their work. We often recommend not paying out all of the rent proceeds to the beneficiaries as it can be helpful to maintain a rainy day fund in case of a leaky roof.
However you decide to treat the property, it is always important to get all of the beneficiaries on the same page. Even though it is typically between family members, getting everything in writing is a great way to prevent any controversy down the road. Inheritance can be a significant part of a financial plan and while we do not recommend relying on it, once the time comes it is important to be efficient with how you manage it going forward.