Like with any new legal or financial situation, it can be intimidating trying to understand what happens when you inherit a house. Addressing this situation brings on emotional and financial decisions you need to make regarding your newly inherited home.
Read further to understand the financial and legal responsibilities and the tax implications of inheriting a home in Massachusetts.
Things to Consider When You Have Inherited a House
There are three things you need to consider when you inherit a house:
- Tax implications, including capital gains or federal estate taxes
- The financial and legal responsibilities, including debt obligations
- What you will choose to do with the home, such as keep it, sell it, or rent it out
All three of these considerations correlate with each other. Most people will decide what to do with the inherited property, which will then be based on the financial and legal responsibilities related to the home. This decision will then impact how you get taxed.
Tax Implications
There is no inheritance tax in Massachusetts. However, you are liable to pay an estate tax if the estate exceeds $1 million. The IRS establishes a fair market value (FMV) when a property is inherited, which becomes the property’s new basis (called the step-up basis). Future taxes are influenced by this new valuation when the property sells.
Capital gains tax is a type of tax related to the profit made by an asset, such as a house. You’re subjected to paying capital gains taxes if you sell the home (step-up in basis). Taxes get paid on the difference between the selling price and the established fair market value at the time of inheritance.
Example:
Your parents purchased a home 30 years ago for $25,000, but its FMV is $300,000, your new tax basis is $300,000. You won’t be subjected to capital gains taxes if you sell the house for $300,000, as there’s no profit. If you sell the property for $320,000, you will pay capital gains tax on the $20,000 profit.
Financial and Legal Responsibilities
Several factors can make an inherited home a blessing or a burden:
- The property’s current condition
- There are several heirs
- Existing debt obligations, such as a mortgage
- Ongoing upkeep and maintenance costs
Is There an Open Mortgage on the Inherited Property?
If there is an open mortgage, you must examine whether it is assumable or due upon selling. Mortgages are frequently assumed by the mortgagee’s heirs. This means that the successors will take over the payments and settle the remaining debt in accordance with the loan’s original terms.
Some loans, such as reverse mortgages, have the unpaid balance paid “due on sale” or when the mortgagee dies. The heirs will then have to sell the house to pay off the loan.
Inheriting a House With Your Siblings
It’s not uncommon for multiple family members or siblings to inherit a house together. Everyone has different opinions and needs, with one preferring to sell the property and the other wanting to rent it out or even live in it.
The heirs will decide what to do with the inherited property depending on its condition. It could be costly and time-consuming if the property weren’t properly maintained.
The heirs will also be responsible for paying taxes, maintenance, and property insurance. Because of these additional costs, it may be a good idea to sell the home as-is.
If You Move into the House…
Moving into the home comes with possible debt obligations, such as an outstanding mortgage. You need first to ensure the debt obligation makes financial sense to you. Before moving in, consider the cost of keeping the home.
If the inherited home has no debt obligations, you can live in the home debt-free. Deciding who will move into the house may be difficult if multiple heirs share the property’s ownership.
Moving into an inherited home comes with financial and legal responsibilities, such as maintaining the property, property insurance, repaying any debt, and paying taxes.
There are also minimal tax implications when you move into the home.
If You Sell the House…
Although it’s a difficult decision to make, selling the house can be the best option, especially if you are multiple heirs sharing ownership. You can forego any financial and legal responsibilities and get cash immediately.
Selling the property will come with costs:
- Closing costs and fees
- Any outstanding debt obligations that need to get paid, such as a mortgage
- Real estate agent commissions
- Costs to fix up the home before selling it
You will have no responsibilities once the property gets sold.
The biggest tax implication comes with selling the home. Based on how long you held the property, you could be responsible for paying long-term or short-term capital gains tax – applicable if there’s a profit from selling the home on the tax basis at the time of inheritance.
If You Rent the House…
Keeping the inherited home as a rental property is perfect for you if you don’t mind being a landlord. With a steady passive income comes responsibilities.
Because the property is not getting used as a primary residence, you won’t be eligible for capital gains exclusion if you opt to sell it in the future. There are, however, several tax advantages:
- Certain expenses can get deducted
- A rental’s earned income gets taxed at a lower rate compared to ordinary income. Your overall income may increase without you moving into a higher tax bracket.
Being a landlord comes with several responsibilities. Even though it can get outsourced to a rental management company, consider the liability of renting a home and all that comes with it.
If You Inherited a Property in Massachusetts and Aren’t Sure What To Do…
Don’t despair if you aren’t ready to navigate this process on your own. We will help you to explore your possibilities, so don’t hesitate to reach out to us.
If you’re considering selling your inherited home in Massachusetts, consider selling it to us for cash. It’s a quick and straightforward process, and you won’t need to do any form of home renovations.
To discuss your situation further or receive a free cash offer, call or text us at 781-309-7085.