Deciding What To Do With An Inherited House: A Comprehensive Guide

Inheriting a house can be significant, often accompanied by many emotions. However, it also brings about a series of legal and financial responsibilities that could seem overwhelming. This guide will walk you through the crucial aspects to consider when deciding whether to sell or rent an inherited house. 

Understanding Your Inheritance: The Legal and Financial Implications

Upon inheriting a house, it is vital to comprehend its legal and financial implications. You must consider it such as

  • The ongoing expenses
  • Including the mortgage
  • Utilities
  • Property
  • Taxes

You’ll also need to consider the insurance. The insurance policy on the inherited property should be rewritten once the owner passes away. It's essential to contact the current insurance company and discuss your coverage options. Short-term insurance might be necessary while the home is in probate, which could be pricier, especially if the house is vacant.

Reviewing the Mortgage and Debts

The outstanding mortgage on the property needs to be addressed promptly. If you're unsure about the mortgage status, check the house's title or request a credit report for the deceased person. It's paramount to continue making payments on the existing mortgage to avoid the risk of foreclosure.

Unpaid contractor bills, second mortgages, or other outstanding debts secured by the home may also come to light when you run a title check on the property. When you become the house owner, these debts usually become your responsibility.

Evaluating Your Options With An Inherited House

The decision of what to do with the inherited home is profoundly personal and depends on various factors. Here are the three main options you can consider.

Option 1: Move In

If the inherited home is in good condition and you can afford the associated costs like mortgage, property taxes, insurance, upkeep, etc., moving in could be a viable choice. However, if you inherited the house with other heirs, you may need to buy them out, resulting in a larger mortgage.

Option 2: Rent It Out

Renting out the inherited property can be a good option if you can't or don't want to live there. It could be a source of passive income, but being a landlord requires significant effort and could be complicated if you co-own the property with other heirs.

Option 3: Sell Your Inherited House

Selling the inherited property for cash can be a reasonable decision if you can't afford the mortgage and maintenance or don't want the ongoing complication of renting or co-owning it. Although it gives you a clean break, you may need to plan for expenses while the house is being prepared and is on the market.

Tax Implications of an Inherited House

Taxes are important when deciding what to do with an inherited house.

Estate Taxes

Federal estate taxes may apply if the estate's combined gross assets and prior taxable gifts exceed a certain threshold. Additionally, some states have estate or inheritance taxes.

Capital Gains Taxes

If you decide to sell the home, your profits may be subject to a capital gains tax; however, the home's fair market value rests upon the owner's death. So, if you sell the house for the same amount as the fair market value at the time of inheritance, you won't have any taxable gains.

Property Taxes

If you decide to live in the house or rent it out, you'll need to pay property taxes, just as the previous owner did. Property taxes can be substantial depending on where you live, so consider this cost.

Weighing the Financial Aspects: Sell or Rent an Inherited House

Deciding whether to sell or rent an inherited house depends on the property's circumstances and conditions.

Selling an Inherited House

Selling an inherited property can yield immediate cash. It could be a relatively quick and easy way to make the most of a home inheritance without adding any future risks. However, selling an inherited home can trigger capital gains taxes on the profit made from the sale.

Renting an Inherited House

Renting out the home can provide passive income and even some tax advantages. However, becoming a landlord involves costs, and dealing with tenants can require a lot of time and attention. Also, renting the home changes your tax implications, so it's advisable to consult with a tax advisor.

Financial Implications of Selling an Inherited Property

Whether the inherited home has a mortgage or is owned free and clear also impacts how selling it works. If the home has a mortgage, the need to keep making monthly payments has to be considered. The heirs can take over most mortgages. However, if there is a reverse mortgage, a type of home loan available to seniors ages 62 and older, the ownership of the home will transfer to the mortgage company on the owner's death.

Inheriting a property can be a blessing, but it also brings a set of responsibilities. Therefore, it's crucial to understand your options and make a well-informed decision. Whether you decide to sell, rent, or live in the house, consider each option's financial, legal, and emotional aspects.

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