According to the Boston College Center of Wealth and Philanthropy, the Baby Boomer generation stands to inherit over $27 trillion in the United States alone over the next four decades. A large portion of that wealth is invested into your parent’s home, but when you inherit the house it can come with emotional and financial issues. When siblings are involved in the decision making process, deciding what to do with the home can be even trickier.
There are three options that you can elect after you have inherited your parents’ home: sell it, move in, or rent it. Each choice comes with its own advantages and disadvantages, emotionally and financially, for you and your siblings.
Selling the House
One of the biggest benefits of selling the home is called a “stepped up basis.” This helps heirs avoid paying large taxes on the sale of the home. The stepped up basis of a house is the fair market value on the date of your parent’s death. When you sell the home, you only pay capital gains tax on the amount that is above the stepped up basis, and that tax rate can be as high as twenty percent.
The best way to go about selling the home is to look at comparable homes in the area and deciding on a minimum price. You should also make sure that the homeowner’s insurance, utilities, and property taxes are paid up and the estate or trust is named as the insured. This negates any issues that may arise between the dates of your parent’s death and the sale of the home.
Moving into the House
If you or a sibling is planning on moving into the home after your parent passes away, the best thing to do is establish advance planning through a family legacy book. This book provides clear instruction on how the assets of the house will be administered while the parent is alive in order to avoid sibling squabbles after death.
Another advantage of moving into the home is that it gives you and your family more time to sort through any belongings or family heirlooms left in the home. However, it is important to keep in mind that your property taxes may increase if your parent had a senior citizen tax break for the home.
On the bright side, there is another advantage down the road if you later decide to sell the home. You may be able to qualify for a capital gains exclusion if you have lived in the home for at least two of the last five years before selling. You can pocket up to $250,000 in profit as a single person or $500,000 as a couple without paying capital gains taxes.
Renting the House
If you do not wish to sell the home, but you also do not want to move in, a third option for your parent’s home is to use it as rental property. You or your siblings can act as a property manager if you live nearby, or you can hire a private company. Another important thing to remember is to change the insurance to a landlord policy to cover any accidents by guests.
However, having the property as a rental can mean a large tax break for you as a depreciation expense. A certain amount of the property can be deducted every year, and improvements to the home can be deducted, as well.