Do you think you might be inheriting property? Dealing with inherited real estate can be both financially and emotionally challenging, but also exciting! Whether it’s a blessing or a burden there are some options for what to do when inheriting property.

Put simply, you have three real options: move in, sell, or rent.

Which of these options you choose will depend on some very personal circumstances, including your current living situation, whether or not you share this inheritance, your finances, and the state of the property, including existing mortgage and liens as well as its physical condition. 

The Consideration for Moving In/Renting Out after Inheriting Property

Often heirs of inherited property will be interested in moving into the home. It’s important to consider your budget before making a decision to leave your current situation, whether it is renting or selling your current home.

State of the Property

You’ll want to find out if the home has an outstanding mortgage that the deceased’s estate has not or will not pay off. Also, keep in mind that there are some mortgages that require the heirs to pay off the mortgage immediately. With a reverse mortgage, for example, there is usually only a limited time to pay off the mortgage in full. If for some reason the mortgage isn’t paid, can you afford to take over payments? 

There are other financial commitments to consider as well, including property taxes, homeowner’s insurance, utilities, and general maintenance. 

Just as you would do when buying a home, you could hire a home inspector to assess the condition of the house. Because repairs can be costly, this will tell you if the property needs significant work that you may or may not want to handle.  

Deciding to keep and move into an inherited property also comes with some tax questions. You’ll want to know about federal and state estate tax, state inheritance tax, property tax, and — when you sell either now or down the road — capital gains tax.

Taxes

In most situations, you do not have to pay taxes after inheriting property. Federal estate tax and state estate tax are usually paid out of the deceased’s remaining estate, not by the heirs.

Some states, though, do have a state inheritance tax on the net worth of the inheritance. Virginia does not currently have this, but you’ll want to be aware should this change. 

Inheritors will, however, definitely be responsible for property tax on any real estate that they own. You will want to have the property appraised to determine its current market value for this and also future determinants of capital gains. 

If, after all of the cost considerations, you still find the home suitable for you and can see yourself keeping it to live in or rent out, congratulations! 

The Consideration for Selling Inherited Property

If you don’t plan to use the property yourself and don’t want the hassle of renting it out, the best option is probably to sell the property.

Selling is usually the right choice if you can’t afford the mortgage and upkeep, the property needs more work than you have time or money to put into it, or it’s in a location that doesn’t make sense for you. Selling also often makes sense when sharing an inherited property with other family members so it’s easier to evenly divide the proceeds of the sale. 

If you choose to sell, in addition to all of the preparations that go along with a traditional property sale, there are additional obligations on an inheritance.

You’ll need to waiting for a probate court to settle the estate before completing a sale, which means that mortgage payments, homeowner’s insurance, property taxes, and utilities will need to be paid (likely out of the estate) while the home is still in your name. You’ll also need to know how to report the proceeds of the sale when tax time arrives. 

Taxes

Inheriting property and selling it requires knowledge of capital gains tax. This is the difference between the amount you sell your property for and its appraised worth. 

If you sell the property for its value (or less), you don’t have to pay capital gains tax… because there were no gains to tax. But if you sell a property for more than it’s worth, the government will tax your financial gain.

There is capital gains tax on almost all real estate property sales, so this is not unique to inheritance. However, inherited property does receive some particular concessions, including assessing taxes on a step-up basis. 

Capital Gains

You’ll want to get an appraisal done as soon as possible to find out the property’s current value, because it is not likely to be worth the amount it was worth when purchased. Inheritors will receive a step-up from the original cost basis so they will owe only the gains from its current market value — not gains from its original sale price. This can be a big difference! 

If you sell the property right away, it is unlikely that you would owe any capital gains taxes. But if you hold on to the property and sell it in a few years, you’ll definitely appreciate only paying capital gains on the stepped-up basis. 

Also keep in mind that there are reliefs for using the property as your primary residence for at least two years. In this situation, you may be able to exclude up to $250,000 ($500,000 for a couple) of capital gains from your taxes. 

Still unsure about what to do after inheriting property?

Ultimately, there are many considerations after inheriting property, and deciding what to do with it can be very emotional. But in the end, it will be your financial situation that dictates your decision.