The First Thing You Should Know About Inheriting Property from Family
Losing a family member is never easy. It can come with a hefty amount of labor in the following weeks and months (and even years) after it happens, from the emotional toll it takes on a person, to arranging the funeral and services and getting the deceased’s affairs in order.
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Even if you’ve always thought that inheriting a property would be a financial relief, it can come with a lot of added stress. Not only will the inheriting party be responsible for maintaining the home, but they’ll also be responsible for its financial upkeep. Paying utility bills, property taxes, and homeowner’s insurance will fall on the shoulders of the inheritor, as well as any renovations and updates that may need to be done.
“There is a lot to keep in mind when you’ve inherited a property,” says Abraham Ames, an associate attorney working with trusts and estates at Tresp Law in San Diego. “But the first thing you’ll need to do is understand how the property was held.”
This is actually more complicated than it seems. If a child is inheriting property from their parents, it’s important to know if the parents owned that property together, if one parent purchased it prior to the marriage, or if a parent got remarried and changed the title to be in joint ownership with the new spouse. In addition, if the property was held in a trust, the process of sorting out the details will be different than if it was passed on in a will or if there was no will left at the time of death.
There are a lot of ways that this can alter the course of how the inheritor should approach their next steps, so it’s important to reach out to an estate or probate lawyer in the state that the property is held to help sort through the jargon and nuances that won’t make much sense to the typical layperson without a law degree.
Housing laws can vary greatly between states, so it’s important to speak with someone who is familiar with the laws that are going to be impacting the property you’re inheriting. If you’ve inherited multiple homes (such as a childhood home and a vacation home in a different state), the best case scenario would be finding a lawyer who is licensed in both states. Sometimes that’s not possible, so if you’ve got siblings, it might be best to split up some of the work between inheritors.
While it can be tough to decide right away whether or not you are ready to part with a childhood home, it’s also important to know that it might be financially beneficial to sell sooner rather than later.
“The value of property for capital gains is stepped up in basis,” Ames says. “Meaning if you immediately sell the property then you may not have to pay any capital gains, or very little.”
This federal law can be complicated to understand if you’re not familiar with capital gains, but basically, when you purchase a property and sell it 30 years or so later, you pay a capital gains tax on the increase in value that happened over those 30 years. When someone dies and passes their property on, the value you pay on is “stepped up” to current fair market value at the time of death. So, the inheritor ends up paying very little in capital gains if they sell right away. This law is only applicable when a parent passes a property onto their children.
Finally, try to coordinate the next steps that you plan on taking with the property. If you plan on keeping it within the family, arrange for autopay on billing and spend some time making necessary updates to the home. If it’s a rental unit, familiarize yourself with the lease agreement and decide whether you’re going to keep it as it is, or move in yourself. And if you’ve got siblings or other family members who have equal ownership in the home, make sure to talk with them honestly about all of your expectations for the property.
Inheriting a property can come with a whole host of complications, often making handling it an administrative headache while in the midst of mourning a loved one. But talking with a lawyer will help streamline the process and make understanding next steps much more simple.