Those who inherit a house do not always view this as a lucky break (aside from the emotional aspect of losing a loved one). The inheritor may already own a home and have no use for another. The inherited house may be saddled with one or more mortgages, and it may also need costly repairs and upgrades. To the inheritor, what could have been a windfall seems like an albatross around the neck.
On the other hand, an astute real estate investor views even a problematic inheritance as a golden opportunity.
Benefits of Inheriting a House
Under federal tax laws, an inheritance is tax-free if the beneficiary is the husband or wife of the deceased or if the property is left to someone other than a spouse and is worth less than an amount specified by law . Many states follow the federal lead, but it is crucial to know the particular provisions of the state in which the inherited property is located.
Fundamentally, the inheritance of a home is a windfall.
“Whether it’s for the purpose of selling the house and getting the equity or renting it and making income and gaining the tax benefits of ownership, such as depreciation, an inherited house can be a very nice benefit,” said Richard Seltzer, an attorney and long-time real estate investor based in Jersey City, New Jersey, in an interview with this reporter.
Challenges of Inheriting a House
At times, an inherited home comes with “baggage.” Seltzer’s story about a new client illustrates this point. The client had recently inherited a house in which his late brother had lived; the house had originally belonged to their parents.
“The house has been totally neglected, and there are all kinds of debts that the client is finding,” Seltzer explained. Nonetheless, Seltzer estimated that, after paying for the repairs to the house, the real estate commission when he sells it, and the debts on the property, the client will walk away with a sizable sum. “Yes, he will have some headaches and some hassles, but at the end of the road, he will make about $100,000, the inheritance is tax-free, and he’ll be happy when it’s done,” Seltzer noted.
To a real estate investor, a neglected property is merely a “fixer-upper.” If the investor chooses to sell an inherited house after fixing it, the sale proceeds can help finance the purchase of another investment property. Alternatively, the investor can rent out the house if the cash flow will be enough to cover the mortgage and operating expenses of the property.
How to Decide Whether to Keep an Inherited Property
Of course, anyone who inherits or is about to inherit real estate can consult an attorney, a tax professional, or a certified financial planner for guidance on what to do with the property and what tax consequences to expect.
In Seltzer’s view, there is one simple guideline for deciding what to do about an inherited home that comes with a mortgage. “It’s just a matter of affordability. If you can afford the payments, then you should keep it,” he stated, adding, “If it’s something that will fit into your lifestyle, you should keep it because in my opinion, real estate is an asset. Most pieces of real estate, if bought properly, are positive assets.”