Sometimes parents want to benefit one of their children by leaving the house to him/her. This can be what sometimes has been referred to as a “mixed blessing.” For one thing the conditions that were in effect at the time of drafting the Will might no longer be applicable. The child might not want the house and may have moved on. The house itself may have deteriorated and needs extensive repairs. It might also need extensive cleanout.
So what do you do if you are the fortunate person to inherit a house? If you are living there you are probably well aware of the obvious limitations in terms of condition. But there are other considerations that might not have come to mind.
You do have choices. Depending on whether you are the only beneficiary or you are buying out other beneficiaries, you could stay, or move in, rent or sell. There are tax considerations and family dynamics that can come into play. Your feelings toward the house and toward its location, and your own finances also need to be considered. Whether you lived there at the time of the passing of your parent or friend can also make a huge difference.
Here are some of the basics.
Taxes. There is good news and not so good news on taxes. Property that was titled in the name of the decedent at the time of death and then inherited receives what is called a “step up” in basis. This is good. What this means is that there is no federal tax on the appreciation in value from the time the person purchased the property until the date of death. As an example, if the person purchased the property for $100,000 and it is now worth $300,000, the federal government does not tax the difference between the $100,000 and the $300,000. If you obtain an appraisal shortly after the death of your parent or friend and sell later provided you live there for two of the last five years you can also begin the “clock” for another tax break which is a $250,000 exclusion from capital gains on resale.
All of this relates to federal taxes i.e. capital gains. If you have a good elder law/estates attorney who also knows real estate, she or he can help with the details.
Another issue is Pennsylvania tax. There is a Pennsylvania inheritance tax on property inherited. Depending on the wording of the Will the inheritance tax regarding inheritance of the house could come from the overall estate or from the beneficiary. We usually indicate in our Wills that it comes from the estate but this is one place where wording of the Will is important. The rate of inheritance tax depends on the relationship of the recipient to the owner. The rate for children is 4.5%.
Mortgage. Another consideration is whether there is already a mortgage on the house. If so, in order to transfer title you might need to satisfy the lender and refinance. One factor is your own finances. Do you have enough to be able to meet monthly payments and is your credit rating good enough to obtain a mortgage in your own name? A good estates attorney with real estate knowledge should be able to walk you through the options.
Repairs. Consider whether the house needs repairs. An advance home inspection could help you decide whether to make the investment.
Property Maintenance. For a reasonable period of time the estate could carry costs associated with the property and, where you decide to sell, it can make sense to have the estate pay for some repairs, upgrades and maintenance in order to be able to obtain a good price at settlement. If there are other beneficiaries open discussion can be helpful to arrive at a consensus regarding how much is reasonable to spend and the return on investment.
Other Owners/Beneficiaries. If the Will says “equally to my three children” or such similar language and you want to buy out the other two, then you need agreement on value/appraisal as well as timing and other details. All of this should be memorialized in a Family Settlement Agreement. The Family Settlement Agreement includes an informal accounting whereby all beneficiaries receive their fair share and sign off on the results.
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.