According to the Holmes and Rahe Stress Scale, the passing of a close family member ranks as the fifth most stress-inducing life occurrence. The passing of a spouse tops the list.
Coping with the loss of a loved one is undoubtedly among the most difficult life challenges you’ll ever face, but you’ll persevere.
In the meantime, however, you’re also inheriting a house. Unless you work in law or accounting, you’re most likely clueless about inheritance laws and taxes.
This can be dangerous, as it’s not uncommon for people to mishandle their inheritance. In fact, about one in three Americans who get an inheritance end up spending or losing it within a couple of years.
Are you feeling confused about what to do next? Let’s look at what you need to keep in mind when you inherit a property.
1. Selling the Home Could Cost You Extra
Putting the home on the market seems appealing, but have you considered that you may have to pay a Capital Gains Tax on Inherited Property?
The good news is that it doesn’t matter how much your loved one paid for the property. What matters is how much the property was worth when your loved one died.
Let’s say, for instance, you inherit a home that’s appraised at $400,000 at the time of your loved one’s passing. If you sell the home for $470,000 three years later, you’ll owe capital gains on $70,000.
That said, living in the inherited home for at least two of the last five years before selling it may exempt you from this tax.
2. State-Imposed Taxes May Come into Play
The federal government imposes an estate tax, which only affects 0.2% of people in the US, but not an inheritance tax.
Currently, only the following six states have an inheritance tax:
- Maryland (0%-10%)
- Iowa (0%-15%)
- Pennsylvania (0%-15%)
- Kentucky (0%-16%)
- New Jersey (0%-16%)
- Nebraska (1%-18%)
Some states have exemptions, especially for immediate family members. It’s a good idea to reach out to a financial specialist or estate attorney for more guidance on how to move forward.
3. Disclaiming the Inheritance Is an Option
You may come to find out that accepting the inheritance isn’t the best decision for your financial future. Perhaps the repair costs or property taxes are too high, or the mortgage is underwater.
For a disclaimer to be valid, you must write it within 9 months of the passing of your loved one. Failing to do so results in the home becoming a personal asset when it comes to taxes.
In the disclaimer, specify the author and date found on the will. Include the address of the inherited home as well.
Put your signature and the date on the document, and make sure you do this in front of a notary.
If it’s a probate property, file the document with the court and mail it to the executor. However, if you got the inheritance through a trust, mail the disclaimer to the trustee.
Deciding What to Do After Inheriting a House
In the end, you have four options: sell the property, rent it out, disclaim the inheritance, or move in.
First, consider the costs of each option, and then put together a plan of action. If you determine moving in is the right choice, don’t forget to get a home inspection and find out if there are any necessary repairs.
Have you decided that you want to sell after inheriting a house? If so, be sure to check out our article on how to sell your home fast!