I Just Inherited a House. Now What? | HouseLogic – Seattle Homes-Seattle Real Estate-Realtor-Http://www.ThachRealEstateGroup.com

By: Richard Koreto

Making the wrong decisions upon inheriting a house can lead to financial and emotional problems down the line. Here are four ways to be prepared.

Make sure to discuss all the options with family members so there’s no confusion.

Your parent has died, leaving you the family home. Suddenly, you’re faced with questions you may not be prepared for. Should you sell the house, rent it, or live in it yourself?

Making the wrong decision could cause serious financial hardships later on, or even lead to family feuds. If you’ve inherited a house—or think you may in the future—here are four things you should do before making any decisions.

1. Remember, the tax man cometh

In recent years, the estate tax has had a high exemption: $3.5 million in 2009, for example. Although the estate tax was temporarily suspended in 2010, most experts believe it will come back in 2011, once again with a high exemption. And 2011 rules may be made retroactive to 2010.

Also largely suspended in 2010: the “step-up” provision. That means the house you’re inheriting may not get a full step up to its current market value for tax purposes. Say your parents bought the house 40 years ago for $15,000, and today you can sell it for $500,000. With a step up, you’ll only have to pay capital gains tax on the difference between the home’s value at the time you inherited it and the sale price. Without any step up, you’ll pay tax on the full amount of the gain—in this case, $485,000.

What to do: Consult a tax professional on the current step-up situation before posting a For Sale sign on the lawn. It might be best to wait before putting the house on the market.

2. Investigate the mortgage

There’s a good chance you’re inheriting a house that’s paid for. But maybe not, if it’s a retirement cottage. And even if the original mortgage was paid off, your parents may have taken out a reverse mortgage to cover expenses in their final years.

You can only assume your parents’ mortgage if you’re going to live in the house yourself, says A. Raymond Benton, a certified financial planner in Denver. If you want to rent out the house, the bank may require you to refinance in your own name. Reverse mortgages can’t be assumed by heirs.

What to do: If the home has a mortgage and you have the cash, pay it off yourself. If not, the house will have to be sold to pay back the bank.

3. Discuss your plans with other relatives

All this assumes you’re the only one inheriting the house, or at least that you’re in agreement with your siblings. But what if you want to sell it and your brother wants to rent it out, or live in it himself?

Steven M. Berger, a lawyer in Severna Park, Md., says in most states heirs who jointly inherit a home are “tenants in common,” and in such situations, one sibling can force the sale of a property. But this is an expensive, emotionally damaging process and should be a last resort.

What to do: Get all the options out on the table with family members. There may be a creative solution. Clients of Jonathan Gassman, a New York CPA and CFP, set up an agreement to use their late parents’ home as a vacation retreat, essentially treating it like a time share and dividing taxes and expenses.

4. Give the house a physical

Even after the financials are settled, you may run into problems if you’re inheriting a house that hasn’t been upgraded for a while. Certain systems may be so antiquated that the place is essentially unsaleable, unrentable, or even unlivable as is.

What to do: If you’re inheriting a house that hasn’t been upgraded in decades, get an inspection before making any decisions. The amount of money you may have to sink into the place just to make it insurable could determine whether you choose to sell it, rent it, or occupy it.

Richard J. Koreto is HouseLogic’s managing editor of finance, taxes, and insurance. He’s been editor of several professional financial magazines and is the author of Run It Like a Business, a practice management book for financial planners. He and his wife own a pre-Civil War house in Rockland County, New York.

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