Steps To Take When You Inherit A Property
October 10, 2020
Inheritance, while seemingly adding assets to your name, is not always a pleasurable experience. You might be grieving the departed and have limited knowledge to deal with the legalities and financial consequences related to inheritance. This can make the whole process more frustrating than it should be.
There could be a lot of paperwork involved and some important decisions to be made. But don’t let yourself down. Take one thing at a time, step by step, and sort it all out. Let us help you. Here is a brief guide on the steps you need to take when you inherit a property.
Understand The Terms
You will be encountering a lot of legal and financial terms when you have to deal with inherited property. Let’s get you acquainted with some of the basic terms.
- Probate – The legal process undertaken to distribute a property
- Inheritors, beneficiaries, heirs – Individuals or a group of individuals who can inherit the property by law or as stated in a will.
- Will – The legal document that names the inheritors and instructions on how the property is to be distributed.
- Estate – The assets to be inherited
- Inheritance or estate taxes – Federal or state taxes due after death. These taxes ought to be paid by the assets or by the inheritors.
- Trust – The establishment or legal document that puts forth the instructions to distribute the property
- Executor- The person in charge of managing the probate process
- Debts – The debts that are in the name of the departed person. Debts must be cleared before the inheritance can be passed on.
The Probate Process
The usual steps involved in a probate process are:
- If there is a will, the court will allow for a probate process according to the terms of the will. In the absence of the will, the state laws on inheritance will be used to distribute the assets.
- An executor will be appointed to carry out the process under the court’s supervision.
- Executed posts bond or insurances to make up for any financial damages caused due to errors in the probate.
- Assets are values, gathered, and documented correctly.
- The date of death values is estimated for each of the assets.
- The deceased’s creditors are informed of the death and allowed to make claims over the assets.
- Estate funds will be used to pay off the debts.
- Final income tax returns should be filed.
- Estate distribution is carried out among the identified inheritors.
Take Care Of The Financial And Legal Responsibilities
As you inherit a property, you automatically become responsible for the associated debts and financial obligations. Here are some of the factors that can make an inheritance complicated.
- Mortgage obligations.
- Maintenance and repair costs required by the property.
- The condition of the property.
- Presence of multiple heirs and share distribution.
Start with evaluating the type of mortgage and how it can be settled. If the inheritors assume the mortgage, they will have to make the remaining payments according to the original loan terms. If it is a reverse mortgage, then inheritors will have to sell the property and settle the loan.
As for the next step, you have to assess the current condition of the property. Estimate the renovation and maintenance costs that would be required.
In case you need money before the probate process is over, you can try to apply for probate loans or estate cash advances.
If you are co-inheriting with your siblings or someone else, it is essential to have a proper conversation on what you intend to do with the property. One of you might want to sell it, and one might want to move in. Discuss the needs and preferences of each person and try to achieve common ground.
Tax Liabilities
Although there is no federal inheritance tax, certain State laws mandate an inheritance tax. But you will have to take care of taxes depending on how you use your inheritance. The IRS sets up a basic value for the property when it is passed down as an inheritance. This is called the step-up in basis, and future taxes while selling the property are estimated based on this value.
Additionally, there is a special type of tax called Capital gains. It is levied on the income generated from an asset. So if you were to rent out your property, or sell it, you would pay the capital gains tax. This tax amount will be calculated for the difference between the step-up basis value and the selling value.
You could get exclusions from capital gains tax if you were to satisfy the following two conditions.
- You use the property as your primary residence for at least two years.
- You haven’t been exempted from capital gains tax for at least two years before the sale of your inherited property.
Decide What You Want To Do With The Property
Once you have estimated the taxes, debts, and other costs related to the property, you have a decision to make. You can choose to:
- Refuse to own the property.
In case the costs are overwhelming and burdening, you may choose to refuse to own the property. Unless you have sentimental values attached, it might be of no use to hold a property that cannot pay back the debts from its selling price.
- Move-in!
Many people find it convenient to move into their parent’s old home as it carries a lot of memories and offers a comfortable choice. There could also be many more practical reasons why you might want to move in.
You can also choose to live in the property for two years before selling it to gain exemption from capital gains taxes. If multiple inheritors share the property, you can choose to buy out from them or pay rents for their share in the property.
- Rent it out!
Renting is a good option if moving is not practical, and you don’t want to waste the property. As long as the property has affordable maintenance costs, you can use the additional rental income to pay off any remaining mortgages and taxes. Do make sure you have the facilities to manage the property or seek help from rental management firms to help you.
- Sell it!
Sometimes selling the property could be the best idea. Make sure the probate process is carried out properly before putting up your property for sale. The documents should be proper, and all legalities should be taken care of. You can even hold auctions or yard sales to sell your inherited assets. Make all the necessary repairs and renovation work to make the property to be in a sellable condition.
Things to Remember While Inheriting a Property
- Keep calm and think through every decision you make with your inheritance. Be it any asset, look for the right ways to use it, or sell it for maximum possible profit.
- Seek help from experts. Hire an attorney to get you through the process.
- Make sure to store the assets in a safe place.
- Remember to alter your own will to include details on the newly acquired assets.
- Make decisions on what you want to invest with and what you want to set aside for savings. Do consider the potential taxes that correspond to any investment, sale, or savings you intend to make.
Ensure all the legal documents associated with the inheritance are correctly recorded and stored in a secure place. Some of these documents include the death certificate, will, trust documents, asset inventory value, and property value related documents.