Is Inheriting a House a Blessing or a Possible Curse?

Inheriting a House

A funny weekly comedy on CBS, depending on your taste, “Ghosts” tells the story of a young woman who inherited a house with no prior notice from her now deceased relative. She and her husband traveled to her new found but old, dilapidated acquisition and, following a near fatal confrontation with the worn electrical system, they come to realize it is inhabited by ghosts from several centuries past. Whether the house is a blessing or a curse (pun intended) is left to the viewer but makes for some unusual twists as the various characters describe
and reenact their prior life experiences.

Most of us are unlikely to inherit a haunted house but we can realize that inheriting a house can be, in some cases, a mixed blessing. It most often needs intensive cleanout. It also requires thought. Should it be kept or sold? Who should live there? If it is a vacation property should it be considered for rental? Have you had experience with this? What were the terms?

Other questions relate to the estate.What is the attitude of other beneficiaries, if any? Will you be considered to have inherited more of the estate than your brothers and sisters and would they be resentful – or grateful they did not have to experience the headaches?

If you decide to live there or have lived there all along are you ready? Is there a mortgage or do you need to get one? How much equity remains in the home? What repairs are needed?

You may be limited also by the terms of a Will.

If you were your parents’ only child the inheritance probably was a foregone conclusion. If you have brothers and sisters there could be a balancing act as your siblings consider whether you received a better deal in the inheritance.

As with most life events there are positives and negatives.

So what do you do? And what are the consequences of inheriting vs. buying a property?

Here are some considerations.

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 by you or by the estate directly and then to you receives a “step up” in basis. This means 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 $50,000 and it is now worth $300,000, the federal government does not tax the difference between the $50,000 and the $300,000 on your resale of the property to another party. This is federal taxes i.e. capital gains. If you have an accountant or a good elder law/estates attorney who also knows real estate, she or he can help with the details. There is also no transfer tax in conveyancing the property to you as beneficiary.

Pennsylvania tax is another consideration. There is a Pennsylvania inheritance tax on property inherited. Depending on provisions in the Will the inheritance tax payment relating to the value of the house could come from the overall estate or from the beneficiary. The inheritance tax rate depends on the relationship of the recipient to the owner. The rate for children and “lineal descendants” such as grandchildren is 4.5%.

Mortgage. Is there a mortgage? One factor is your own finances. If you refinance 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?

Repairs. A home inspection by a certified home inspector could help you decide whether to make the investment in repairs.

Property Maintenance. For a reasonable period of time the estate could carry costs associated with the property and cleanout and repairs needed to sell the property at a good asking price can be deductible for Inheritance Tax purposes.

Other Owners/Beneficiaries. If the Will says “equally to my three children” or similar language and you want to buy out the other two, you need an agreement on value/appraisal as well as timing and other details. All of these understandings can 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.

If you are not sure ask for help from an elder law or estates attorney and/or real estate professional.

About the Author Janet Colliton

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.

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