When you inherit a house 

Things to consider about an inherited house

• You will have to decide whether to live in the house, rent it out, or sell it.

• You can take time to decide, but be mindful of ongoing costs when you do so.

• If you sell, you will be subject to capital gains tax, calculated from the date of your loved one’s death.

• If you inherit with others, you will all have to agree on what happens to the house.

Inheriting a house from a loved one can seem like a generous windfall, or an enormous nuisance. Or both. In any case, if you are the new owner or part owner of your loved one’s house, you will now be faced with far-reaching financial decisions, such as whether to keep the property to live in, rent it out, or sell it. 

These choices can be fraught with emotional impact, and you may have to come to agreement on them with others in your family. You will have to take into account many factors, like the property’s financial and physical condition, any tax or legal ramifications, the family’s financial resources and needs, the opinions of any other heirs, and your own needs, emotions, and desires.

Assessing your options

When a loved one leaves you a home, deciding what you will do with it is much more than just a financial decision. If possible, it can be helpful to allow yourself time to deal with your feelings before you make any definitive choices. You will, however, need to pay taxes, insure the property, and meet the mortgage payments until you make these long-term decisions.   

Whether your inheritance is more of a blessing or a burden can depend on a few key factors.

Level of debt

If the home still has an active mortgage, the person who receives the property will be able to sign a new mortgage with the lender for the remaining amount, or they can try to refinance. In most cases, a spouse or other close relative will be simply allowed to take over the original mortgage.

If the house was used to finance debt, as in a reverse mortgage, the unpaid balance is generally due when the heir receives it, so they must either pay the full amount back or sell the home to settle the debt. 

If the mortgage was co-signed, the co-signer has full responsibility for the mortgage payments, even if they have no ownership rights to the house. 

If there is a lien on the property—which could result from unpaid property taxes, unpaid debts, or a court judgment—the beneficiaries also inherit this liability. Creditors are usually entitled to be repaid from the estate before any assets are distributed to heirs, but if the house is inherited with the lien still in place, the new owner will be responsible for the lien. Generally, a property with a lien cannot be sold without paying the lien. 

Current condition of the property

If the home has not been well maintained or recently updated, it could need costly and time-consuming improvements in order for you or someone else to live there.  

Ongoing costs

The heirs are responsible for paying any tax, property insurance, and maintenance costs on an ongoing basis.

Even if you would like to keep the house, sometimes the expenses outweigh the property’s value, and it makes financial sense to sell. If you inherit the house with others, you will all need to agree on a course of action, so looking at the financial outlook can help you make a decision less clouded by emotions.  

Capital gains taxes

In most cases when you inherit a home, you are protected from significant capital gains taxes by what’s called the “step-up tax basis.” That means the home’s fair market value is calculated on the date when your loved one passed away, and you are only taxed on any gains between that date and when you sell it. If your loved one’s entire estate is large enough that it is subject to federal estate taxes, you may be able to calculate this step-up basis from a date six months later.

If you keep the home and it is your primary residence for at least two years, you may be eligible for a capital gains exclusion if you decide to sell later, depending on your tax profile. 

Occasionally, decisions about the house that affect capital gains calculations need to be made during the probate process, e.g., if the house needs to be sold to satisfy debts or the will dictates that the property be sold. In that case, the executor arranges a formal appraisal and files a tax return on behalf of the estate using that valuation.

Options when there are multiple heirs

It’s common to inherit a property with others, such as when a will divides the entire estate up equally between siblings. The number of people sharing ownership and their individual wishes will dictate what happens with the house. It’s often worthwhile to invest in an appraisal from a real estate professional experienced in inherited homes, so that you have a basis for the discussions you will have with one another.

In the best-case scenario, everyone agrees on next steps. Unfortunately, differences of opinion often happen, and you may need to bring in an attorney or mediator to help settle the dispute. What’s more, extended disagreements can mean paying ongoing property tax and other maintenance costs, as well as increased capital gains tax if the house increases in value, or decreased property value if the market shifts or if the house becomes run-down.

If one of you wants to keep the house and the others want to sell, buying the others out is a relatively easy transaction, whether you pay them in cash or agree to finance their portion of the home’s value. If you don’t have access to a mortgage, your siblings may agree to accept a promissory note that outlines the monthly installments plus interest that you’ll pay. 

It’s also fairly straightforward if all of the heirs agree to sell the house and split the profits. Of course, you will also have to agree to how much effort and money you are willing or able to put into renovation and upgrades. 

For many families, it makes more financial sense for all of the new owners to continue owning the house equally and convert it to a short- or long-term rental property. Your ongoing income from the house will be the net profit after maintenance and property management costs have been paid, divided between the owners.

If the heirs cannot agree, you’ll have to file what’s called a lawsuit for partition, which asks a judge to order the sale of the home. This may cause difficult family divisions at an already challenging time, but unfortunately one owner can't force another to sell an inherited home or tell them they cannot live in the house without going to court.

Making long-term decisions about an inherited house can take an extra emotional toll when you are in the midst of grieving. It’s not unusual to want to keep the house even though it doesn’t make financial sense, or to feel guilty because you prefer to sell the house. Remember to treat yourself kindly, take the time you can, and reach out to your support system when you need them.

You may be eligible for free bereavement support. Empathy can help with everything from funeral planning to estate administration, with step-by-step guidance and real-time expert support. Many people get free premium access to Empathy as a benefit with their life insurance claim. We partner with New York Life, Guardian Life Insurance Company, Bestow, Lemonade, and other leading carriers. When you make your life insurance claim, talk to your representative about whether Empathy is a benefit they offer.