If you’ve been designated as a beneficiary of someones estate and those assets include real estate you’ll need to be prepared for the financial consequences, good and bad. If you’re the surviving spouse – legal transfer of the property to you should be fairly quick and without tax consequences. Because it’s complicated, it could take several weeks for the executor of the estate and the courts to properly allocate the deceased’s assets and property. Following the death, the executor of the will has to file the will in probate court, a judge will then determine if the will is valid, if deemed valid the assets of the estate will then be distributed as laid out in the will.
When ownership of the real estate is transferred over to you, there may be federal, state and/or local taxes deducted from the estate if the net taxable worth is more than $1,000,000 (for the state of Oregon) and above $5,000,000 at the federal level. In addition to, or instead of, the Estate tax some states have an inheritance tax based on the value of the estate received by each individual beneficiary rather than the entire estate.
If you decide to sell the inherited home right away, you will likely have to pay capital-gains tax on the difference between what you net from the sale and the basis, which is simply the purchase price, plus improvements and minus depreciation. The federal capital-gains tax is currently 15 percent. However, if the property is a personal residence, you may be exempt from having to pay the capital-gains tax on the first $250,000 if single or $500,000 if married. It’s generally better to wait and sell the home after the title has been transferred to you. Once the real estate is transferred the property should be appraised, this establishes a new basis for the property which could reduce your capital gains tax tremendously if you do decide to sell eventually.
The potential tax consequences aren’t the only thing that you have to consider when you inherit the real estate. One of the other common complications is that if the home is mortgaged, that will inevitably have to be paid off. In some cases lenders treat the death of a borrower as a trigger for immediate loan repayment. If the loan has provisions for survivorship through a trust or deed, then the current loan will remain in effect. Transferring the property title can be a long and tedious process. The property may be reassessed and property taxes will likely go up. Last but not least, the property will need to be insured, under your name as the new owner.
Inheriting real estate can be more complicated than one would think especially if more than one beneficiary is named. In that case we can hope the will is very specific about what is to happen with the property and what the percentage of ownership each beneficiary is. This can become fairly contentious but it’s certainly not worth ruining a relationship with a family member so do be careful. Having estate sales and clearing the belongings of the deceased can be a rather big task as well.
Are there any other sticking points that I have left out when it comes to inheriting real estate?
Dulcey is a member of Rentec Direct who provides Property Management Software, tenant ach payment processing, tenant credit check, and criminal reports for property managers and landlords. The information in this post is just that, informational and should not be used as a substitute for legal advice.