What to Do When You Inherit Property
Last Updated: September 13, 2023
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Key Takeaways:
- Property is among the assets that can be listed in probate.
- Be aware of tax obligations when inheriting property.
- You can either move in, rent out, or sell inherited property.
Table of Contents
- What is probate, and how does it affect property inheritance?
- What if there is a lien on my inherited property
- How do I add my name to the deed?
- What to do once you’ve inherited property
- Move into the inherited property
- Rent out the inherited property
- Sell the inherited property
- What do I do if I inherit a home in poor condition?
Understanding the responsibilities of inheriting property is crucial for making decisions about its future and your own.
In this article, we’ll cover probate, taxes, and what you can do moving forward after you receive the keys to this new chapter in your life.
What is probate, and how does it affect property inheritance?
Probate is the legal process of distributing a deceased person’s assets. During this process, a probate court validates the Last Will and Testament. Then, a personal representative distributes the estate.
Who pays to maintain the property during probate?
The estate should be able to pay to maintain the property. Generally, it’s the executor who handles maintaining its physical upkeep during probate.
Unfortunately, if the estate cannot afford to pay the bills or maintain the property, you might be unable to inherit it.
If the estate has more debts than assets, it becomes insolvent. This means that the beneficiaries will not receive anything, and debt that is not covered by the estate will remain unpaid. The creditors are paid in order of priority, as determined by state law.
Can you rent out the property during probate?
Yes, you can rent out the property during probate, but the rules vary from state to state. For example, executors in California can immediately rent out the property, while those in Ohio need permission from the courts first.
Renting out the property might be beneficial as it can sometimes increase the value of the estate.
Can you skip the probate process to speed up property inheritance?
Unless the deceased set up certain contracts or legal documents before they died, beneficiaries typically have to wait through a lengthy probate period before inheriting. People sometimes list high-value properties in a Living Trust to avoid the public probate process. This could accelerate home ownership to weeks rather than months.
Do I automatically inherit in the home if I'm the beneficiary?
No, the items in the deceased’s home might also need to go through probate. Some things may need to be assessed. Or, they may be intended for other beneficiaries to inherit.
This may be the case for sentimental or high-value items such as:
- Artwork and antiques
- Vehicles
- Clothing
- Jewelry
Remember, probate laws vary from state to state and may impact your ability to control the home's contents. Check your state’s official probate code to see what laws may apply to you.
What if there is a lien on my inherited property
A lien is a debt tied to a property that enables creditors to get ownership if the debt remains unpaid. If you are bankrupt and inherit property, the creditors can also place a lien on it.
How do I pay off a lien?
Here are some options for paying off a lien on an inherited home:
- Use your funds to pay off the lien. This is the quickest way to pay off the lien if you can use the money in your savings.
- Negotiate with the creditors for a settlement. This allows you to pay off the debt at a reduced amount. You can also negotiate the loan repayment date, buying you more time to gather funds.
- Take out a loan to pay off the lien. If the lien is small, you might prefer to pay it off immediately to ensure your ownership of the property. Then you can take your time making loan repayments in the future.
- Refinance the home by taking out a mortgage on it. This could be the best option if you have the money to do so and plan on selling your current home.
- Sell the home and pay off the lien with the proceeds you make from the sale.
How do I add my name to the deed?
Once the probate process is complete, the estate’s executor can assist the beneficiary with gaining full ownership of the home. This means creating a new deed that lists you as the owner. Here are the steps that you can take to add your name to the home’s deed:
- Get a copy of the probated will: This copy has gone through probate. The probated Will is necessary for you to change the deceased’s name on the deed to yours. If you are the estate's heir or beneficiary, your name will already be on the Will.
- Confirm the nature of property ownership: Before the name on the deed changes, you must list whether you own the home by yourself or share it with another person.
- Obtain a death certificate to prove that the original owner is deceased: Contact the vital’s office in the state where the death occurred. You can order a copy of the death certificate online, by mail, or in-person.
- Draft a new deed naming you the owner: Finalize the deed by crafting a new draft with the updated ownership details. Then, notarize the deed and make it official by filing it to your County Recorder’s Office.
Sometimes, the deceased will have a transfer-on-death deed (TODD). Upon their passing, TODDs help move the property deed in their name over to their beneficiary.
Some states also have enhanced life estate deeds, known as ladybird deeds. This deed allows the deceased to control the property while alive but then transfer it without going through probate once they pass away. The property will be passed to the beneficiary once the original owner passes away.
Check to see if your state allows either of these deeds.
The Office of Vital Statistics (OVS, or vitals office) is responsible for collecting and preserving birth, death, and marriage certificates. They issue all certified copies of these certificates.
What to do once you’ve inherited property
Step 1. Get the house appraised
Appraising the home could help you with estate planning, selling decisions, and tax obligations. If you hire a licensed real estate appraiser, they will do the following:
- Note any major upgrades that have taken place since the home sale
- Inspect the interior and exterior of the home
- Check the home's structural integrity
- Take photos of the property
- Look for safety issues
You can search for a real estate appraiser online or ask local agents for a recommendation. Check that any real estate you hire adheres to the Uniform Standards of Appraisal Practice (USPAP). Doing so ensures that your home will be appraised under strict guidelines.
Is there a difference between property appraisal and property assessment?
The municipal property assessor determines the yearly estimated worth of a home, which is called its assessed value. The assessor collects the property tax information to calculate this.
Step 2. Understand your tax obligations
There are four different taxes that you should be aware of when inheriting property or real estate:
Federal and state estate tax
The Federal and state estate tax is paid from the deceased’s remaining estate. So, as the heir, you usually don’t have to worry about paying this tax. If the estate meets the criteria set by the IRS, the executor will file the estate tax.
State inheritance tax
In some states, you must pay a state inheritance tax on the networth of your inheritance. As of 2023, onlysix states impose an inheritance tax:
In some situations, surviving spouses are exempt from paying the inheritance tax, and other family members often pay a reduced rate.
Capital gains tax
If you choose to sell an inherited property, sometimes you must pay capital gains tax on the money you gain from the sale. The government applies this tax on the financial difference between the amount you sell the property for and its appraised worth.
If you sell the inherited property for more than it’s worth, the government taxes your financial gain. You don't have to pay capital gains tax if you sell the property for its value or less.
Step 3. Evaluate your options to move in, rent, or sell the property
These options need careful thought as they could impact your finances and potentially your emotions and memories associated with the home. Here is what each option entails.
Move into the inherited property
Perhaps you were renting before and wanted to buy a house. Maybe you were already looking for a bigger home because your family is growing. Consider all factors before moving, including preparing for any financial or legal challenges.
What if there is an outstanding mortgage on the home?
In many cases, the Last Will will specify that the outstanding mortgage will be paid by the estate. However, in cases where there is still a balance left over, or it isn’t specified in the will, you will be responsible for making monthly payments. You have three options for paying off the mortgage:
- Assume the mortgage by continuing to make monthly payments.
- Pay off the debt out of pocket or through your savings.
- Refinance the inherited home through a rate and term refinance , which allows you to change the mortgage terms by making them easier. You can lower your monthly payments, reduce the interest rate, or change your loan type or term length.
If you discover that moving into the rented property isn’t for you, try renting it out instead.
Rent out the inherited property
Renting out property is an excellent way to supplement your income. It also lets you write off repairs and other expenses of your inherited home. For example, you can use the rent payments to help cover the mortgage or the property tax.
Our article A First-Time Landlord’s Guide to Renting covers the basics of renting out property, including:
- Finding the insurance that benefits you and your property
- Preparing your property for rental and managing tenants
- The benefits and drawbacks of renting out your home
Renting out your inherited home may be the best choice if you want to keep the property close to you but aren't interested in moving into to it.
It is possible to be a landlord even if you live in another city or state. Becoming a long-distance landlord might seem daunting at first, but it’s doable with the right resources and good communication.
Remember: some states favor landlords while others prefer tenants. This might factor into your choice of renting out the property. If you aren't interested in renting the property out, you could sell it.
Whether you rent your property in the same area or at a distance, creating a Residential Lease that clearly outlines your terms and conditions is crucial to the relationship between you and your future tenants.
Sell the inherited property
It won’t be easy to sell an inherited home, especially if it has personal significance. However, selling might be better for you in the long run. For example:
- You’re sharing the inheritance with your siblings or other family members
- The house is in another city or state, and you’re unable to relocate
- You can't afford the upkeep if the home is in severe disrepair
Note that there is no time limit on selling inherited property. Once the probate process is complete, you can sell the property anytime. Once probate is complete, you can start preparing the home for sale. This includes:
- Continuing any necessary payments while the home is still in your name, such as the mortgage, homeowner’s insurance, property taxes, and utilities.
- Checking the titles and deeds for the property, as you will want to ensure that there aren’t any restrictions on the home or the land.
- Paying the inheritance tax if you are required to do so.
- Cleaning the home and removing the deceased’s personal belongings and, if it has not already been done, ensuring that any items another heir is entitled to or under the probated will or the Revocable Living Trust covers them have been given to them.
- Hiring a real estate agent to help you place the home on the market and sell the property, or sell the home yourself if you’re not interested in paying a real estate agent.
Take our helpful quiz, Which Type of Real Estate Deed Do I Need? to determine which deed works best for you.
Remember, after you complete the sale, you must pay any necessary capital gains and report the sale proceeds on your personal income taxes.
What do I do if I inherit a home in poor condition?
You are not obligated to keep the home if it is in poor condition. You can decline (disclaim) your inheritance or sell the home as is.
Disclaim your inheritance
If you disclaim your inheritance, you won’t be responsible for the inheritance tax, and it won’t increase the size of your estate. This reduces any estate tax your estate may need to pay upon your passing. You must follow the requirements specified by the IRS and ensure that your reasons for declining are confirmed with state law.
This is called a qualified disclaimer. However, disclaiming your inheritance also means that you will no longer have a say in what happens to the home afterwards. This decision is final.
To disclaim your inheritance, you must do so within nine months of the deceased’s passing.
Sell the home as is
You can choose to sell the home as is for a cash offer. This quick option can lead to the sale of the inherited property within weeks. Many first-time buyers, investors, or house flippers are interested in this arrangement.
You typically don’t need to clean or repair the home if you are selling the home as is, though some mortgage loans might require you to do repairs before you sell the home.
To sell a home as is, you just organize a viewing with a potential buyer, and if they are interested, they will make you a cash offer. You then either choose to accept or decline.
The downside to selling a home is that you might have to sell it for a lower price than you normally would.
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