What To Do if You Inherit a House: Financial and Tax Considerations

Purchasing a home is often one of the most significant financial decisions and stressful experiences in a person’s life. However, inheriting a property from a parent or relative can be just as overwhelming, presenting unexpected challenges. While navigating the emotions of losing a loved one, you’ll also need to determine the best course of action for the inherited home. Whether you choose to keep, sell, or rent the property, understanding the financial and tax implications is crucial. Here’s a step-by-step guide to help you navigate the transition.

Step 1: Assess the property’s condition and value

Before making any decisions, get a professional appraisal to determine the home’s fair market value. Consider hiring a home inspector to uncover potential maintenance or structural issues. Understanding the property’s worth and condition will help inform your next steps.

Step 2: Understand tax implications

One of the biggest financial considerations is taxes. Here’s what you need to know:

• Step-up in basis: The property’s tax basis is “stepped up” to its fair market value at the time of inheritance, potentially reducing capital gains taxes if you sell.
• Estate taxes: Most estates fall below the federal estate tax exemption but check state laws as some have their own estate or inheritance taxes.
• Capital gains tax: If you sell the home later for more than its stepped-up value, you may owe capital gains tax on the difference.

Step 3: Evaluate financial responsibilities

Owning a home comes with costs beyond just the mortgage. If you can’t afford these expenses or don’t want the responsibility, selling or renting the property might be a better option. Make sure to account for:

• Property taxes
• Homeowner’s insurance
• Utility and maintenance costs
• Homeowner Association (HOA) fees

Step 4: Decide whether to sell, rent, or keep

• Sell: If you don’t plan to live in the home and want to liquidate the asset, selling can provide a financial cushion. Take into account local real estate conditions as one of the factors to consider when evaluating if it’s an opportune time to sell.
• Rent: Turning the home into a rental property can generate passive income but requires landlord responsibilities and ongoing maintenance. It’s also important to evaluate whether establishing a business structure, such as a Limited Liability Company (LLC), makes sense to help shield your assets from potential lawsuits or debts related to the property.
• Keep: If the home has sentimental value or fits your long-term plans, keeping it can be a viable option. Consider refinancing if you need to buy out other heirs or adjust financial obligations.

Step 5: Settle outstanding debts or mortgages

If the inherited home still has a mortgage, you’ll need to determine how to handle it. Some lenders allow heirs to assume the mortgage, while others may require refinancing. If there are outstanding debts against the estate, selling the home might be necessary to cover them.

Step 6: Consult a financial or estate planning professional

Before making any major financial moves, seek advice from an estate attorney, financial planner, or tax advisor. They can help you understand your options and make decisions that align with your long-term financial goals.

For more information, contact your wealth advisor. If you’re not a Mercer Advisors client and would like to learn more, let’s talk.

¹ Dittman Tracey, Melissa. “Study: Homeowners Associations Are Booming.” National Association of REALTORS®, 14 March 2024.

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