A recent article in Elder Law Answers, www.elderlawanswers.com, an online publication for lawyers and clients, caught my attention mostly because it raised issues I had not thought of explaining in detail to clients. The article was titled “When Inheriting Real Estate, Consider Your Options.” Sometimes we as estate attorneys deal with issues that are so obvious to us we miss that others may be unaware of the options available to them. One of these questions is what to do when inheriting a house. You do have choices. Depending on whether you are the only beneficiary or you are buying out other beneficiaries, you could move in, rent or sell. Those choices can be affected by whether you are an only child or one of several, whether you are an only beneficiary, or whether you need to buy someone else out. Your feelings toward the house and toward its location, and your own finances also come into play in deciding. Whether you lived there at the time of the passing of your parent or friend can also make a huge difference.
The article covered some basics. Here are some of them.
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. Note 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 then move in or if you already live there and the house is transferred into your name you can begin the “clock” for another tax break which is an additional $250,000 exclusion from capital gains on resale after you have lived there for another two years. All of this assumes that you have settled with the other beneficiaries of the estate. If you have a good elder law/estates attorney she or he can help with the details and even arrange for the transfer, again with the agreement of the other beneficiaries.
One note not included in the article but relevant to Pennsylvania is that there is a Pennsylvania inheritance tax on property inherited. It is due from the estate. The amount 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 may need to satisfy the lender and refinance. One consideration 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 should be able to walk you through the options.
Repairs. If the house needs repairs and you are considering moving in, this is an important consideration. 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. A good estates/elder law attorney can prepare it for you and show you how. 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.