What you should know if you inherit your parent’s home
By Hook Law Center
If you decide to sell the house, view listings of comparable homes that have sold in the neighborhood and adjacent towns, and decide upon a minimum price. Make certain that the homeowner’s insurance is paid and current, and that the estate or trust is designated as the insured in the event anything happens to the house after your parents’ death and prior to the sale. The same applies to mortgage payments, property taxes and utility bills. Upon the sale of the property, you will be required to pay the balance of the mortgage, real estate commissions, transfer taxes and other closing costs. If you move into the house, there may be a rise in property taxes for you, as the house may be worth more than before. However, any special property tax break for seniors may not apply to you.
Nevertheless, if you subsequently decide to sell the house, and the house has increased in value, you may be eligible for the capital gains exclusion. Thus, if you are single, you will not have to pay capital gains taxes on a maximum of $250,000 profit, and if you are married, you will not have to pay capital gains taxes on a maximum of $500,000 profit. In order to qualify for this exclusion, you must reside in the house for a minimum of two of the last five years prior to the sale.
You may, instead, wish to rent out the house to generate income while still using the property during certain times of the year. For instance, the house could be a vacation rental, and at other times, you and your family could use it for family get-togethers. If you live relatively close by, you could serve as property manager rather than hiring one, thereby realizing savings of 10 to 30 percent of the rent.
In addition, you will have to switch the insurance coverage to a landlord policy that covers the structure and personal property along with medical and legal liability in the event a tenant is injured and files a lawsuit against you. This type of insurance also covers loss of rent in case the property can no longer be inhabited because of a covered loss.
You will also realize a tax benefit by modifying the house into a rental. The depreciation expense will help to lower your taxable rental income. Regarding tax savings, the house is a depreciable asset, and a certain portion of its value can be subtracted each year. Furthermore, you can depreciate improvements, such as a new roof, if they add value and lengthen the life of the property. However, in the event you sell, you will have to repay the depreciation to the IRS, and you will not be eligible for the capital gains exclusion because the house is not your main residence.