Are you finding it difficult to decide what to do with a house you have inherited?
When deciding whether to sell your inherited home or rent it out, there are many things to consider, including which choice would offer you the best benefits in terms of financial stability, legal obligations, and physical maintenance.
So, is it better to sell or rent an inherited house?
Selling the house can be the wisest course of action if it needs pricey repairs or is out of state. However, if you have a strong emotional connection to the house and the mortgage is paid off, renting it out can be worthwhile.
Your particular circumstances and the home you inherited will determine whether it makes more sense to sell or rent an inherited property. Below, I’m going to share all the factors you need to consider, including the benefits and drawbacks of making this decision.
Key Takeaways
When a home is inherited, there are obligations in terms of money and law. You will be responsible for paying the mortgage, utilities, and property taxes. You could be tempted to sell the house for a big sum or list it for rent to generate more money.
If converting an inherited house into a rental property is not financially beneficial, would require a ton of work, or the location is not rent-desirable, it might be better to sell.
If an inherited house can successfully be converted into a rental and generate an additional income stream, it might be better to rent.
Should You Rent an Inherited House?
To avoid conflict with the local government, review your local housing laws.
To draw in the right tenants, you must present the house in the best possible way. Once you start getting requests for the residence, screen any prospective tenants.
You may increase revenue and attract tenants by setting a competitive rental rate. Obtain a lease agreement for the property and keep accurate records of your income and spending.
After renegotiating the mortgage and arranging for a professional examination and repair, only then should the home be rented out.
Pros
Taxes on Rental Property Are Lower
Renting a house is a fantastic source of passive income.
This is not the same as earned income, which is money you get from your job. A portion of each paycheck you receive from your job goes to the IRS as FICA, Medicare, Social Security income, etc. The total amount of these taxes, which are withdrawn from every paycheck, is about 8%.
Many landlords start in the industry purely to convert their earned income to passive income, which is taxed differently.
Passive revenue is sometimes referred to as "mailbox money" by landlords. They don't actually need to "work" for it. Once a month, they go to the mailbox to collect the rent.
Tax deductions for depreciation and repairs may be available if you have rental revenue. You can deduct your property taxes, insurance premiums, maintenance costs, and mortgage interest if you own a rental property.
Rent Payments Can Cover an Existing Mortgage
You might be allowed to keep the house and let the rental revenue cover the debt if you inherited a property with a mortgage.
Along with the mortgage, you can use rental profits for additional expenses like landlord-specific insurance, vacancies, property taxes, and repairs.
Cons
Risky Tenants
The blessing and the curse of being a successful landlord are tenants. You appreciate your rental property if you have good tenants. You despise your rental property if you have problematic tenants.
It takes an intelligent landlord and thorough applicant screening to avoid poor tenants. That entails promptly addressing issues and complaints.
Even excellent landlords with thorough tenant screening occasionally run across troublesome renters. Every landlord has terrible stories about their tenants.
Tenants can damage the property or quit paying rent. You might end up spending money to evict your renters and deal with the fallout.
Making Repairs
Some tenants don't treat rental properties like their own. As a result, your inherited rental home might need more maintenance than a home you own.
Fixing significant problems like roof leaks, burst pipes, or electrical issues can be very expensive and reduce your rental income.
Obligated to Capitalize Rather Than Deduct Expenses
Capitalization is the process through which deductions for costs that increase the value of your rental property are spread out over several years.
You might need to spread out the cost across several tax years if you put in a new roof that costs you $12,000. However, you might be able to fully deduct the expenditures if you wait a few years and repair the roof rather than replace it.
Usually, repairs are deductible in the year they are made. But improvements to your property must be dispersed.
Taxes and Depreciation Recapture
Appliances, paint, flooring, and many other things all experience wear and tear. You are "allowed" by the IRS to reduce the cost of products over time, even if you didn't spend any money on them. Who wouldn’t want additional tax breaks?
The IRS compels you to depreciate some items, but a "depreciation recapture tax" is due when you sell the property.
The years of deductions you have amassed are now due for payment by the IRS. The IRS taxes you at a flat rate of 25% on all your depreciation deductions when you take them out and seek to sell your rental property later.
This implies that you will have to pay 25% of your depreciation deductions if you decide to sell the house, even if you're retired or in a lower tax bracket.
Calculating Rental Income
Management and upkeep of a rental property are necessary. The owner may perform these duties or hire others and manage their work.
As a general rule, allocate 10% of the rent for property management and an additional 10% for maintenance.
Add these figures and deduct them from the rent amount, along with mortgage principal and interest, property taxes, and insurance.
Don't forget to factor in any HOA fees that could be necessary.
The leftover amount is your rental income.
Should I Insure the Property as a Landlord?
If you plan to rent the house, you should get insurance.
Most lenders actually require insurance if you're financing the property or still have a mortgage on it.
To determine the risk of insuring the residence, the insurer will want information on your renters' insurance histories, occupations, names, and dates of birth
When Would Landlord Insurance Be Necessary?
Get landlord home insurance coverage if you require protection from liability, property damage, and loss of income.
Theft, vandalism, or extreme weather conditions may result in property damage, and liability claims may include legal bills and medical expenses.
What Is the 1% Rule?
When determining if a property is profitable, keep in mind the 1% rule of real estate investing.
This rule states that residential property should generate a rental income equal to up to 1% of the purchase price each month. The house is not worth your investment if it generates less than 1%.
What Is the 50% Rule?
Even a brand-new house will likely require a new roof in 20 years. It will require new paint and carpet in five years. These repairs will be required sooner if the house is older.
According to landlords that follow the 50% rule, between 25% and 50% of their rental income is lost due to vacancies, repairs, insurance, management, etc.
This percentage varies according to the neighborhood, the type of repairs the house will require, and how well it has been kept.
Even for repairs that are several years away, a seasoned landlord will plan for them and start saving money.
Additional Factors to Consider Before Renting an Inherited House
The cost of property management and maintenance will probably rise if you are an out-of-state heir because you will need to factor in the price of a property manager.
As the inherited home can’t be used until it is in a rentable condition, costly repairs must also be taken into account.
If your inherited home is located in a popular tourist destination or large city, you can anticipate a lower vacancy rate and higher rent.
Instead of only bringing in long-term tenants, inheriting a property in a popular area opens up the possibility of successfully marketing on vacation rental websites like Airbnb.
The emotional connection to the residence (especially if it's a family residence) is the last factor to be considered when renting a property. Renting will enable you to maintain the property while earning money if you're interested in caring for the family house and having tenants.
Should You Sell an Inherited House?
The inherited property may be sold. Selling the inheritance can be the best option if you split it with other family members. The sale revenues can then be equally divided among family members so that everyone gets their fair portion.
If you don't have the money to invest in it or if the house is located elsewhere, it can be a good idea to sell the property. It can also be practical if you cannot pay the maintenance and mortgage payments.
Wait for the probate court to make a decision on the estate before selling the home. You should pay all debts, including utilities, real estate taxes, homeowner's insurance, and mortgage payments.
Here are some pros and cons of selling the inheritance.
Pros
Managing Rental Properties Requires a Lot of Work
Becoming a landlord can be expensive and time-consuming, and you shouldn't treat it like a hobby—it's business.
To decide if you're up for it long-term, you should consider the drawbacks of owning a rental property.
What if the house you inherited has neglected maintenance, requires numerous costly repairs, or is a hoarder residence?
When you sell a house as-is, the buyer purchases the home in its existing state, sparing you from paying for any upkeep or repairs that come with renting the house.
Even though the property is sold "as-is," you still have to disclose any known flaws to the buyer. Any potential buyer must be legally informed of any flaws you are aware of.
Avoiding Probate Saves Time and Money
A judicial procedure known as probate is used to handle a person's estate after death. Probate can be challenging, time-consuming, and expensive.
It can be hard for families to deal with the loss of a loved one while attending meetings with attorneys, accountants, mortuary services, and other professionals.
Quickly selling an inherited house can help families avoid a complex nightmare of legal and financial issues.
Cons
It Costs Money to Keep an Empty House
A vacant home sitting on the market incurs growing costs and ongoing expenses. Your finances can take a serious hit from property taxes, homeowners insurance, utilities, upkeep, and normal wear and tear.
If a house remains unoccupied, it will gradually deteriorate over time, which could cause its value to plummet significantly.
Inherited Houses Typically Need Repairs
Because the previous owners were frequently elderly, unwell, or just unable to do necessary maintenance, most inherited homes are in poor condition. Before selling it, the beneficiaries will be in charge of making all required repairs.
Even if everything goes according to plan and you hire a reliable contractor, repairs are expensive.
You’ll Have to Pay Capital Gains Tax
Unfortunately, you will have to pay capital gains tax if you sell the house you inherited. You will be required to pay capital gains tax on the difference between the original purchase and final sale prices.
If you inherit a home with an assessed value of $300,000 and sell it for $400,000, you must pay capital gains taxes on the $100,000 difference.
Selling the House to Siblings
Do you have a sibling who wants to buy the house? A sibling may be able to potentially purchase the family house at a discount if they do this while still enabling the other heirs to collect their inheritance.
This can greatly assist a sibling in need of a home. The only heirs who must be compensated when a sibling wishes to purchase the family home are the other heirs. As a result, the sibling can purchase the house for less money.
Selling a Mortgaged Home to a Family Member
You will still be responsible for paying the loan if you inherited a house with a bank mortgage.
Most loans have a provision allowing the lender to request full repayment of the loan if the property's ownership changes.
However, as long as the mortgage, insurance, and property taxes are still paid on time, family members can stay in the house.
You run the danger of the lender accelerating the mortgage payoff if a family member wishes to change the name listed as the owner on the title. If this occurs, the new owner must obtain a new loan to repay the existing lender.
The family member should ultimately try to get a loan to repay the current mortgage.
Selling Through a Real Estate Agent
You can sell your house through a real estate agent.
Perhaps all you need to do to maximize the value of your inheritance is to paint and carpet your home. You can spruce up the house and give it a new, clean, and inviting look for buyers for just a few thousand dollars. The best course of action in this situation is probably to sell using a realtor.
Unless you're in a seller's market, you probably won't be able to sell the house for top dollar if it needs a lot of repairs. Additionally, you’ll have to pay the real estate agent’s commission.
If You Don't Want to Sell an Inherited Home, There Are Other Options
If selling isn't the best option for you, there are several other possibilities. They consist of the following:
Live there for a while: Rather than immediately selling the house you inherited, you could decide to stay there for a while. When you finally decide to sell the house, you may be eligible for additional capital gains tax benefits if you have lived in it as your principal residence for at least two years.
Allow other heirs to buy you out: Do any other family members or heirs have strong opinions about what should happen to the property? You could give them the option to get rid of you. You get some money from this and are released from the responsibility of maintaining another property.
Additional Factors to Consider Before Selling an Inherited Home
What if the Property I Inherited Needs Pricey Repairs?
Calculate the cost of the repairs if the house you inherited needs numerous costly renovations, such as a new roof, HVAC system, or mold removal.
When it comes to big repairs, it's typical that the cost you incur won't be represented in the amount you get for the house when you sell it.
By selling to a local investor in your area, you can avoid having to pay for repairs since investors will buy homes in need of pricey repairs in their current state.
Is it Possible to Sell My Inherited House at a Loss?
Consider a short sale if the inherited house isn't worth what is due on it.
To avoid the inheritor having to make up any shortfall, the lender agrees to let the home's owner sell it for less than what is owed. Because the property is sold "at a loss," lenders must approve these sales.
Final Reflections
Deciding whether to rent or sell an inherited home depends on your situation, the property, and your ambitions.
The loss of the loved one who left you an inheritance might make you sad, and deciding what to do with the home can make you feel stressed.
If you recently received an inheritance, assess your financial circumstances and balance the advantages and disadvantages of renting vs. selling to determine which option is right for you.
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There are significant tax considerations when a house is inherited. Several different heirs might have a stake in the property. Everyone needs to be on the same page.
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