Is the home the next family heirloom?
If you’ve shopped for a home recently or currently work in real estate, you know fewer and fewer Americans are moving, for a number of reasons. In 1990, approximately 7.7% of homeowners moved over the course of the year, by 2016 that figure declined to just 4.2%. In 2017, Zillow reported 86% of all American homeowners who have owned their home for one year or more were not interested in moving in the next three years.
According to Zillow, the top reasons Americans aren’t moving are:
- 58% love their home
- 45% like their neighborhood
- 23% plan to leave their home to a family member
Will homes become the new family heirloom? Approximately 14 million homeowners think so. What do you do if you inherit a house? You have three main options, you can move into the home and live there, you can turn it into a rental and earn income, or you can sell it for a profit. Your choice may depend on the mortgage status of the property and the number of stakeholders.
What you do with the home may depend on the mortgage status, especially if you currently have a mortgage of your own?
- Due-on-sale clause – if the home currently has a mortgage and also has a “due-on-sale” clause that means the mortgage must be repaid in full if you sell the property. This could implicate how much you sell the property for, or you could just move in and assume the mortgage payments.
- Reverse mortgage – if the home has a reverse mortgage, the beneficiary will have to repay the equity withdrawn from the home before selling the home. You will only have a limited time to repay these funds, usually about six months. You can also refinance into a new mortgage to avoid having to repay the loan yourself.
- Underwater property – if the original owner of the home did not keep up with the payments, and the home is underwater, you may have to sell the home through a short sale or foreclose on the property. Talk to the bank or lender about your options if you find yourself in a situation like this.
- Mortgage paid off – if the mortgage is already paid off, you can inherit the home free and clear.
If you plan to live in the home yourself or keep it as an investment property, you will not be immediately liable for taxes. You’ll have to pay property taxes or other state and local taxes if you occupy or rent the property. If you choose to sell the property, you will have to pay capital gains taxes. However, the home will be taxed on any gains between the time you inherit the home and the time you sell it. So, don’t worry if your grandmother purchased her home for only $25,000, you won’t be taxed on decades of appreciation.
You may inherit a home with multiple stakeholders, like your siblings or cousins inheriting a home from parents or grandparents. When multiple stakeholders are involved, you’ll have to agree on how to split the property.
- Buyout – the stakeholder who wants to keep the home can buy the other stakeholders out of the home. This can be done through cash or financing, depending on the cost of the property.
- Promissory note – if one stakeholder wants to keep the home and the other stakeholder is ready to sell, but you don’t have the cash or financing option, you can record a promissory note or a legal document that outlines how you’ll buy them out along the way, including any interest that may be due.
- Sell together – if none of the stakeholders are interested in living in or renting out the property, you can sell the home together and split the profits.
- Rent together – if the stakeholders are interested in renting the property, you can rent and split the monthly profits. The amount each stakeholder gets may be determined by how much they contribute to maintenance or property management costs.
When you inherit a home, the financial impact and tax liability depends on how you plan to use the home. If you move in, you’ll be responsible for any existing mortgage, maintenance, or other costs related to ownership. You won’t be liable for taxes right away but will have to pay annual property taxes like with any other home. If you keep the home and rent it, you’ll be responsible for any maintenance and property management costs, and the mortgage if there is one. You’ll also have to pay property taxes, but you can deduct expenses related to maintenance and property upkeep, since it’s a rental property. If you sell the home, you’ll have to cover any needed repairs before the sale and any real estate agent fees. Depending on how much you profit from the sale, you’ll also have to pay capital gains taxes.
If you’ve inherited a property and have any questions about it, let me know and if you don't have one already I will refer you to an attorney or financial specialist.