Inherited House: Your 3 Main Options
When you inherit a home, you generally have three choices: move in, rent it out, or sell it. The “best” option depends on your financial goals and the property’s condition. A key advantage for heirs is the “Step-Up in Basis,” which resets the property’s value to the current fair market value (FMV) as of the date of death, potentially saving you thousands in capital gains taxes if you choose to sell.
Quick Consideration Checklist:
- Tax Liability: Sell quickly at FMV to avoid capital gains, or live in it for 2+ years to qualify for primary residence exclusions.
- Mortgage Status: Check if the loan is “assumable” (you take over payments) or “due-on-sale.”
- Maintenance: Assess the cost of repairs needed to make the home rentable or “market-ready.”
- Probate Speed: Real estate often takes months to clear probate. An inheritance advance can provide liquidity while you wait.
Losing a loved one is a difficult journey, and settling the estate adds another layer of complexity—especially when the estate’s largest asset is real estate. If you’ve inherited a house, you are facing a major financial decision. Here is a breakdown of the three key areas you must consider before making your move.
1. Tax Implications: The “Step-Up in Basis”
While there is no federal inheritance tax, the way you are taxed on a future sale is determined by the Fair Market Value (FMV) at the time of the owner’s death. This is known as a step-up in basis.
- Selling Immediately: If you sell the home shortly after inheriting it for its appraised FMV, you will likely owe little to no capital gains tax.
- Living in the Home: If you use the house as your primary residence for at least two of the last five years, you may exclude up to $250,000 ($500,000 for couples) of profit from capital gains taxes when you eventually sell.
- Renting: Rental income is taxed, but you can deduct property taxes, insurance, and maintenance costs, often making it a lucrative long-term investment.
2. Managing the Mortgage
Does the house still have a mortgage? You need to determine if the loan is assumable. Under federal law, many mortgages can be taken over by heirs, allowing you to continue making the same payments at the original interest rate. Alternatively, you may need to refinance the loan or use estate funds to pay it off entirely before the title can transfer to you.
3. Condition and Repairs
An inherited house that hasn’t been updated in decades may require a “market-ready” renovation before it can be sold at a premium or rented to high-quality tenants. These costs can be substantial. If the estate doesn’t have the cash on hand to fund these repairs, many heirs use an inheritance advance to get the liquidity needed to fix up the home, thereby increasing its eventual sale price.
Final Advice
Regardless of which path you choose, make sure the decision serves your long-term financial health. Consult with a certified financial planner or a real estate professional to understand the local market and the specific tax laws in your state.
Frequently Asked Questions
You generally do not pay federal taxes just for receiving the property. However, you will be responsible for property taxes moving forward, and you may owe capital gains tax if you sell the house later for significantly more than its value at the time of the previous owner’s death.
Typically, no. The title cannot be legally transferred until the probate court confirms the executor’s authority or the final distribution order. If you need cash from the home’s value before probate ends, an inheritance advance is the most common solution.
A step-up in basis is a tax rule that adjusts the “cost basis” of an inherited asset to its fair market value at the time of the owner’s death. This eliminates the capital gains tax on the appreciation that occurred during the original owner’s lifetime.
