Deciding what to do with an inherited home can carry both emotional weight and financial consequences. Here, Rachael walks through a few key things to consider before deciding whether to move in, rent, or sell.
Transcript
If you’ve inherited or are expecting to inherit a home from your parents or someone else, this video is for you. We’re going to discuss a few things to consider, including renting versus selling, tax consequences, and expenses that people don’t often talk about.
I’m Rachael. I’m a financial advisor with Hello Inheritance, where we help women and couples navigate the financial and emotional sides of inheriting wealth.
Before we get into exactly what to do with the home you’ve inherited, there are three universal first steps that should be done regardless of what direction you choose.
Three Universal First Steps
Professional Appraisal
The first is getting a professional appraisal. Whether the home will go through probate or whether siblings are also part of the inheritance, having an objective third-party valuation is incredibly important. Getting an appraisal establishes a fair market value which you’ll need for the step-up in cost basis, tax filings, and even family conversations about whether someone wants to keep the home or maybe buy out another sibling. This helps reduce the chances of conflict by giving everyone a factual starting point before making any decisions.
Home Insurance
Another important step is reviewing and updating the homeowners insurance policy. In many cases, the existing policy was written in your parents’ or your relatives’ name and may no longer provide coverage once they’ve passed away. Some policies may also limit coverage if the home is vacant.
By updating the policy in your name or securing an estate-owned policy if needed, you protect the home while you’re deciding what to do next. This is a straightforward step, but one that can definitely prevent headaches later on.
Clearing the Home
Finally, many of the inheritors we’ve talked to have told us that they had no idea how long it would take to clean out and prepare their parents’ home.
Sorting through belongings, making repairs, deciding what to keep or give away. It can all take far more time and energy than one might expect. Also, this process is tender and can be potentially overwhelming. It’s completely normal to feel unsure about where to begin.
It may be helpful to know that there are professionals who specialize specifically in estate cleanouts, whether that’s preparing to rent, sell, or just give you space to breathe. By hiring someone, you may be able to reduce the emotional load and make the transition a bit more manageable.
What Should I Do with the Home I’ve Inherited?
Moving In
Once these foundational pieces are in place, you can start thinking about what you actually want to do with the home. If you plan to move into the home you’ve inherited, that’s great. If it’s in a city or a neighborhood you love, or if the idea of living in a home that’s already paid off appeals to you, I don’t blame you. But there are a couple of things to keep in mind, especially if you’ve never owned a home before.
For example, even if there’s no mortgage, there are still ongoing expenses.
The biggest one that people often don’t think of is property taxes. Property taxes can vary widely depending on location and the value of the home, but they often fall around 1% of the home’s value, which is due annually.
This is one thing that is definitely worth confirming before making the move. Keep in mind that property taxes typically increase over time as property values change. And if the monthly or annual cost isn’t something you’ve planned for, it can create financial strain.
Another cost is HOA, which stands for Homeowners Associations. Many neighborhoods have HOAs, which each homeowner in the neighborhood pays towards monthly in exchange for things like landscaping, utilities, or community amenities like pools. HOA fees can range from under $100 a month to over $1,000 and often increase each year. Make sure you factor that into your monthly budget before making a move.
Renting
If you don’t want to relocate or you don’t wish to live in your childhood home, you have two main options, rent or sell. If you plan to rent out the home, here are a few things to keep in mind.
First, becoming a landlord may be the golden ticket. Especially on a home that is paid off, rental income can be a simple and effective way to earn mostly passive income while holding onto the home and enjoying its appreciation over time.
However, becoming a landlord is not always smooth sailing. Something to seriously consider is, do you have the time and energy to screen tenants, coordinate repairs and stay on top of leases, maintenance needs, and tax reporting? If you’re intent on holding onto the home, hiring a property manager can take many of these things off your plate. They typically charge somewhere around 8-12% of the monthly rent.
And finally, finding renters can be a challenge in and of itself. If you’re not in a particularly sought after area, you may find yourself going weeks with the property sitting vacant and not earning any income in the meantime. It’s worth doing some research or even talking to a real estate professional in your area to find out what the rental market is like.
Selling
Now, if you’re thinking about selling instead, I want to acknowledge that it can be challenging and perhaps even heart-wrenching to think about selling your parents’ or loved one’s home.
Either way, what you’re experiencing is absolutely natural and normal.
And when you feel ready to look at the financial side, there are a few things that can help bring clarity.
The first is good news. When you inherit a home, it usually comes with something called a “step up in cost basis.” That simply means that the home’s value is reset to what it was worth on the day your parent or loved one passed away. Practically speaking, this means you’re not taxed on decades of appreciation during their ownership, only on any growth that happens after it becomes yours.
So you’re not taxed on all the growth that happened during their lifetime. If you sell the property soon after, you’d likely owe little to no capital gains tax.
Something else to consider is if you sell the home, you’ll have something that renting doesn’t give you much of: Options. After selling the home, there are many ways you could use the proceeds. You could consider paying off your own home, pay down debt, invest for retirement.
Additionally, selling can simplify your overall financial picture and potentially make your finances easier to manage.
The Gist
When it comes down to it, selling or keeping an inherited home isn’t just a financial decision, it’s an emotional one. There’s no one size fits all option, but depending on your needs, your capacity, and your long-term goals, you can find clarity about what the best option is for you.
If you’re feeling unsure about the numbers or the taxes or what makes sense for your situation, you don’t have to navigate it alone. We help women and families through transitions just like this every day.
If you’d like support in understanding your options, you can schedule a call with us anytime at HelloInheritance.com.
Disclosures
This content is for educational purposes only and is not specific investment advice. Advisory services for Hello Inheritance are offered through Bourke Wealth Management. Please visit www.bourkewealth.com for important investor information.
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