Everything You Need to Know if You Inherit a House | The Complete Guide
Was a house just left to you in a will and now you want to know what to do with your inherited real estate? Here’s a complete guide to everything you need to know, consider, and decide when you inherit a home.
Inheriting a house can be a big surprise or shock – during what is probably already an emotional time. Every inheritance situation is different, but this guide will help you make sure you know how inheriting property will affect you.
As top real estate professionals in Virginia Beach, we’ve walked many clients through the process of deciding what to do when they inherit a property. Our Complete Guide to Inherited Real Estate will help you understand what to expect, what to look out for, and ways to make the most of your new asset.
Important reminder: We are not CPAs, estate planners, or lawyers – these are all other important contacts to have if you inherit a house.
What’s the best thing to do when you inherit a house?
No two situations in which someone inherits a house are alike, so what ultimately happens to the house may differ from one property to the next. Here are some actions you should certainly take right away, no matter what you plan to do with the property.
Call your lawyer or family estate planner. It’s crucial to speak to trusted professionals to get a clear idea of what inheriting the property really means in your case, and to know if the asset will go through probate. Once you have been given clear title to the property, talk with tax professionals and, of course, a trusted real estate agent or Realtor®.
Secure the property. Make sure the house is protected, as properties that look vacant can be more at risk for break-ins. Lock up everything, close the windows, and do what you can to make sure no one else has access. Especially if you live far away, make sure the home is thoroughly secured so you don’t return to find damage.
Assess the condition of the property. Take a look around and get a general idea of the condition of the house you inherited. You’ll want to know if it’s currently livable, or what kinds of repairs it will need before you live in it, sell it, or rent it.
Transfer the utilities. Change all the utilities into your own name as soon as possible to avoid late fees or shut-offs, and determine if there are any you want to cancel for the time being.
Pay any past due taxes or utility bills. These bills come with the property, so clear any bills owed as soon as you can to keep the rest of the inheritance process straightforward.
Get an appraisal. It’s not likely that inheriting a house will require you to get an appraisal, but it can be a good idea. A home appraisal will prove the value of the property to the IRS at the time you inherited the property and set your stepped-up cost basis. It can also help you know how to best insure the property.
Understand the mortgage situation. If there’s a mortgage on the house you inherit, it still needs to be repaid. Talk to the lender about the details of the mortgage so you can make an informed decision about whether to live on the property, hold it, or sell it.
Check the home owners insurance policy. The same policy can’t always be kept when the policy holder passes away. It is always best to connect with the current insurer to see what your options are. If the house goes through probate, you may not be able to make changes to the current policy right away, so stay in communication with the insurance company as much as possible.
What are my options when I inherit a house?
Especially if the previous owner’s death was sudden or unexpected, you may find yourself wondering, “What should I do with this house I inherited?” Each situation is different, but inheritors often find themselves doing one of these:
Organize a sibling buyout.
This is when contacting your family estate planner is crucial, as you want to make sure that you are the sole inheritor before making any big decisions. If the house was left to more than one person (usually siblings, but not always), you’ll either have to come to a total agreement about what’s done with the property or arrange a buyout. One of the inheritors can agree to purchase all other portions of ownership from the others, or inheritors that aren’t interested in the property can choose to transfer their piece of the deed without receiving payment.
Hold the property and rent it out
If you don’t want to live in the inherited property, you may choose to rent it out as a source of passive income. This could help you pay off the property’s mortgage or your own. Review local housing laws to make sure this is a reasonable option. If you’re becoming a landlord for the first time, it’s a good idea to seek out some expert landlord coaching to get set up properly.
Turning your inherited house into an investment property? Make sure you’re on our mailing list for tips on how to manage rental homes like a pro.
Live in the house you inherit
The house is yours, so you may choose to live in it. It’s crucial for those interested in occupying an inherited house to fully understand the property’s mortgage status. We’ll dive into inheriting a house with a mortgage or reverse mortgage in the next section.
Sell the house you inherit
There are plenty of reasons you might choose to sell the house you inherit. You may prefer liquid cash as your inheritance, have several inheritors and need an easy way to split it, or the property is too much work to maintain. Your first step will be to get in touch with a top real estate agent or Realtor®. If you decide to sell the house right away or a bit later, make sure to read the sections below on costs related to owning and selling an inherited property.
What happens when you inherit a house with a mortgage?
If you inherit a house with the mortgage, you do assume responsibility for the debt on the house, and it still needs to be repaid.
Your first action here should be to contact the lender and make sure payments are up-to-date. If you let them lapse, the loan will incur interest and late fees, or the lender could foreclose on the house. (If you’re not the executor of the estate, you may need the executor’s assistance in dealing with the lender.)
Depending on the lender and type of loan, you’ll have a few options for handling the remainder of the mortgage:
Pay off the loan. You can use current cash or assets to pay off the loan in full. If you sell the house or rent it out, those profits can be used toward the mortgage loan. Alternatively, you can refinance to get a new loan in your own name.
Assume the loan. If the lender or loan servicer allows, you may be able to assume the loan in your name, keeping the terms and rates the same as they were for the house’s previous owner.
Accept a deed in lieu of foreclosure. If you aren’t prepared or interested in taking on the mortgage, this option provides a legal agreement between you and the lender so you can avoid foreclosure costs. You’re transferring ownership of the home to the lender, and they forgive the rest of the mortgage.
Quick tip: Selling your house for cash could be another way to avoid foreclosure and still make a profit on an inherited home.
What happens when you inherit a house with a reverse mortgage?
Learning that you’ve inherited a house with a reverse mortgage can be confusing or alarming. The bank may have sent a formidable notice that the property will be seized unless the mortgage is repaid immediately.
If you inherited a house that has a reverse mortgage, pause and breathe deeply. You have some options.
What is a reverse mortgage?
A reverse mortgage is a type of loan available to homeowners 62 years and older who have equity in their homes. Instead of paying a monthly mortgage rate, the lender pays the borrowers out of their equity. While a useful tool for many seniors, it can leave a tricky situation for those who inherit.
When you inherit a property with a reverse mortgage, you should immediately contact the lender. Reverse mortgages become due once the borrower passes away, leaving the heirs 30 days from receiving the notice from the lender to pay off the balance of the loan.
Can I get an extension on a reverse mortgage I inherited?
Yes, but you need to prove you are working on selling the home you inherited or obtaining new financing to purchase the home back. Typically, extensions on reverse mortgages are granted for six months.
Can I sell a home with a reverse mortgage?
If the balance owed is higher than the value of the home you inherited, you have the option of selling it for no less than 95% of the appraised value of the home. The remaining balance will be covered by the mortgage insurance that the original borrower paid over the life of the loan.
What costs come with inheriting real estate?
Inheriting a house or property might not be a financial benefit to you. Homeownership comes with many costs, so it’s important to be aware of the financial obligations that may come with a property you inherit.
Probate Depending on how the deceased set up their will, their assets may have to go through a process called probate to determine the rightful heirs. A probate tax will apply that varies by state. (In the state of Virginia, for example, the cost of a probate court is $0.10 per $100 in estate asset value. So an estate with a value of $500,000 would be charged $500 in probate taxes.)
Removal of possessions Regarding removing the deceased’s possessions, you have a few options. You could hold an estate sale, which may bring in some additional cash. Charitable donations could also provide you with a tax deduction. Otherwise, you might opt for storing or getting a dumpster for this process, which will come with a cost.
Renovations If you want to sell or occupy the home, there may be updates and repairs needed to get the property into shape. Often, there are opportunities to sell the house without completing major repairs yourself, but you may lose out on some potential profit.
Utilities Once you are considered the owner of the inherited property, there may be utilities to pay. Make sure to collect any previous bills and information if possible so you can cancel any utilities you won’t be using right away.
Insurance If you are the legal representative of the estate, any insurance payments that have fallen due are now your responsibility. You’ll want to contact the current insurance agent as soon as possible to see if any changes to the policy are required. Don’t leave your new asset uninsured and at risk!
Maintenance As with any property, there are costs associated with maintaining it. Upkeep, landscaping, and keeping the major systems checked and updated are a few of the major ones.
Property Taxes Inheriting a house may affect your taxes. And going too long without paying property taxes could leave you at risk of losing the house. We’ll explore property taxes and other taxes in-depth in the next section.
While inheriting a house can be very exciting, it may be that all the costs simply aren’t worth it to you to hold onto the property. Selling your house quickly may be the best option (and we can help!).
How does inheriting a house affect my taxes?
There are a few different ways inheriting a property can affect your taxes, whether you live in it, sell it, or rent it out. Many of these vary by where the property is located and what you decide to do with it.
Local property tax Based on the tax-assessed value of the property you inherit, this tax amount is set by the local municipality in which the home is located. Property tax rates vary widely, so it’s an important factor to calculate in when deciding if you’re going to hold the property long-term. If these taxes were included in the deceased’s existing mortgage, they are very likely up-to-date. However, if the home was paid off or you aren’t sure they were included, check with the local tax office to make sure there are no past due taxes on the property. They’ll need to be paid biannually.
State inheritance tax Some states – like Virginia – do not charge an estate or inheritance tax. If the deceased lived in a state that does, however, this will be charged at the time of inheritance. This tax is typically based on the value of the entirety of the estate. The states that charge inheritance taxes generally give you at least eight months to file a return.
Federal estate tax The IRS sets a threshold for this tax on estates – if the property you inherit is part of an estate valued above the threshold, you (and the other inheritors) will be subject to the federal estate tax. No matter what your new house is worth, we highly recommend consulting a professional CPA or tax advisor to determine your tax liability. If you owe federal estate taxes, you generally have 9 months from the decedent’s death to file this with the IRS.
Capital gains tax This one is only paid if you sell the property. It’s based on the amount the asset appreciates during the time you hold it. When you inherit the property, the IRS will apply a “step-up in basis,” setting the updated value of the property upon inheritance. If the property's value increases from the stepped-up basis for the home before you sell it, you’ll owe capital gains on that appreciation. (Read more on these below.)
Is selling an inherited property taxable?
Selling any property has its costs, including inspections, necessary repairs, and commissions for a real estate agent or Realtor®. However, there are some additional costs to consider when selling a property you inherited.
Long-term capital gains tax When and if you sell the home, a gain will be considered the difference between the sales price and the stepped-up cost basis. The current capital gains tax rate will apply to the appreciation value. (Psst – Read on for ways to avoid paying capital gains.)
Long-term capital gains tax rates for 2023 tax year
Up to $44,625
$44,626 – $492,300
Married filing jointly
Up to $89,250
$89,251 – $553,850
Married filing separately
Up to $44,625
$44,626 – $276,900
Head of household
Up to $59,750
$59,751 – $523,050
Short-term capital gains tax Because inherited real estate is considered to have been “purchased” by the beneficiary, the same day the deceased bought it, it’s unlikely you’ll have to worry about short-term capital gains if you inherit a house. As long as the property has been held by you and/or the person who willed it to you for over a year, your gains are considered long-term.
Hazardous Risk Premium If you sell your inherited property less than a year after the deceased passed away, you’ll have to pay this additional fee if you want the proceeds right away. You can choose not to pay the fee, but the proceeds from the sale will then be held in escrow for a year. The Hazardous Risk Premium acts as insurance against any unknown debts the deceased may have had that weren’t known at the time of closing. (For a reference, we’ve found that the premium in Virginia is $2.00 per $1,000 of the sales price.)
Can I avoid paying capital gains tax on my inherited real estate?
Most taxes on the sale of an asset are inevitable, but there are a few ways to avoid being charged a capital gains tax on a property that you inherit.
Live in the home first. If the property serves as your primary residence for at least two years before you sell it, you’ll be able to avoid some or all of the capital gains tax on the sale.
Sell your house fast. If the property’s value doesn’t have time to appreciate, you may be able to avoid paying any capital gains tax. If you inherit a $400,000 property and sell it right away for $400,000, there are no capital gains.
Hold onto the property and rent it out. If you’re not going to live in the house, you can consider renting it out. Then, when you sell it, you will have the option of a 1031 exchange to purchase another investment property and thus avoid capital gains on your real estate.
The Bottom Line
Inheriting real estate can be exciting – but it also comes with a lot of questions. We hope this guide helps you understand the difference between inheriting a house that’s paid off vs. inheriting a mortgage, grasp how inheriting property affects your taxes, and decide what you can do with your new asset.