Are you feeling overwhelmed when trying to decide what to do with a house you recently inherited?
An inherited home comes with increased financial and legal responsibilities. You'll have to pay property taxes, utilities, and mortgage (if the house has one) when you take up its ownership.You may be tempted to put up the house for rent for an additional income or sell it for a lump sum. Your personal circumstances and financial stability may determine whether you should rent and get landlord insurance coverage or sell the house. You may even consider moving into the property if you can afford it.
Either way, you should weigh the advantages and disadvantages of each of these options. You should also look at the long-term impacts of either option for sustainability.
Below, we help you compare whether renting or selling the house can be beneficial to your case.
Renting the Property
Review your local housing laws to avoid getting into trouble with the local authorities. You should also present the house in the best light to attract your ideal tenants. Screen any potential tenants once you start getting requests for the home.
A competitive rental price can help you attract tenants and raise income at the same time. Get a lease agreement for the rental and maintain a sound bookkeeping system for your expenses and revenue. Only rent out the house after refinancing its mortgage and scheduling a professional inspection and repair.
Consider the one percent rule of real estate investing as you evaluate property's profitability. According to this rule, a residential unit should produce up to 1 percent of its purchase price as rental income every month. If the house produces less than 1 percent, it isn't worth your investment.
Pros of Renting an Inherited Property
Since you'll be in charge of the house, you can determine the rental price and choose your target tenants. You may even rent out the property for short-term vacation stays to maximize your rental income.
Renting the house may be a good idea if it's a condo or suburban neighborhood-based in a trendy neighborhood. The rental income can be an ideal source of passive income if you already have an existing job. Unlike earned income, passive income sources like rental income attract lower taxes.
The rental income will also give you a steady flow of income on a long-term basis. You can even profit from the house whenever its price increases. The profits may help you support your family members that require financial help.
Rental income can entitle you to tax deductions for depreciation, repairs, and legal fees. As a rental property owner, you can also write off your mortgage interest, insurance, maintenance repairs, and property taxes. The property also allows you to enjoy write-offs on legal and professional fees and insurance.
Cons of Renting an Inherited Property
The downside of renting out an inherited house is that you'll have to manage the property independently. If you hire a property management firm, the maintenance fees will eat into your income and you will have to screen the companies that you hire in order to avoid bad ones.
Since the IRS classifies rental income as a form of income tax, you'll need to pay tax on the earnings. You also have to keep the electrical goods and wiring safe and check your gas for safety issues.
As a landlord, you risk encountering unreliable tenants who don't pay in time. You may, at times, find it stressful to evict the tenants legally.
Your inherited house may also start wearing out while its value will depreciate over time (Note: this depends heavily on the market and location).
Selling the Inherited Property
You may sell the inherited property. Selling the inheritance may be ideal if you share it with other family members. You can then divide the sale proceeds evenly for each family member to receive their share.
Selling the property may be wise if you don't have the resources to invest in it or if the house is based in another location. It may also be convenient if you can't afford the upkeep and mortgage fees.
Before selling the house, wait for the probate court to rule on the estate. You should fully meet financial obligations like utilities, property taxes, homeowner's insurance, or mortgage payments.
You can sell the inheritance with an agent or to an investor or list it as FSBO. Though a real estate agent can help you get the best market value for the house, they require a commission. You'll have complete control of the sale when selling it as for sale by owner, while an investor will only pay for the property without considering its market value. Consider these pros and cons of selling the inheritance:
Pros of Selling an Inherited Property
If the house belonged to a loved one, selling it can help you get rid of the memories attached to it. The lump-sum received from the sale may also improve your financial position. You can use the lump sum to clear your debts and cover your living costs for a long time.
Proceeds from the sale may fund your dream project or be used to upgrade your current home. You'll also be freed of the responsibility of managing and maintaining the house.
You'll get all the proceeds from the sale if you're selling the inherited house to a cash buyer. Expect to pay six percent of the total sale as commission fees if you involve a real estate agent. You also won't make any repairs since investors buy a house as it is.
You may use the lump sum to invest in a high-interest savings account, shares, or stocks. These forms of investment can maximize your earning potential in the long term.
The IRS allows you to exclude $250,000 of the sale proceeds from your income. You may also exclude up to $500,000 of the sale proceeds if you submit a joint tax return with your current spouse. However, you must have owned and used the home for more than two years before its sale date.
Cons of Selling an Inherited Property
You get less value from the proceeds if you sell the house as soon as you inherit it. That's because most real estate properties increase in value over time.
If the property's current appraised value is less than the mortgage balance, you won't make any cash off the transaction. The same thing applies to mechanics liens, unpaid taxes, and any hold on the title.
You'll have to make the house more presentable and marketable for it to attract high bids. The cluttering process may be emotional if you're still grieving since it involves moving your loved one's belongings.
The capital gains taxes will be higher if you sell the house immediately. The IRS will charge you the tax on the profit made from the sale proceeds.
Selling the house will restrict you from enjoying a constant stream of income, like renting it out.
The process is also time-consuming and stressful.
Expert Insights From Professionals
We asked professionals with experience and here are their responses:
Ari Shpanya, co-founder & CEO of SF-based LoanBase:
Inheriting a property can be a blessing after a tough event or it can make the thought event last longer. Usually, when people inherit a house the first thing that comes to mind is to make it their new main home, or rent it and make a profit out of it.
However, some properties are simply not in good condition for none of those options, mainly because in some places the rental income is not good, or the house needs too many renovations. When both of those circumstances collide, it is best to sell the house.
Selling inherited property is always a difficult decision, mainly because we put a lot of sentimental value on it, but sometimes it is the best decision to make in the long run. Now, keeping the house can be a good idea if you don't have a house of your own if the inherited property is better than the one you actually have, or my personal favorite reason; if the property is valuable enough to rent it, and get a profit.
Galina Portnoy, CPA, at Tag Associates:
- If there is more than one beneficiary, often it is better to sell and divide the proceeds between beneficiaries to avoid any conflicts.
- If converting the inherited house into a rental property is not economically beneficial or location is not rent desirable, it is better to sell.
- If the house requires a lot of work and the beneficiary has no monetary funds to do so, it is better to sell as-is.
- If the property can be converted into a rental and can generate an additional stream of income, but the beneficiary is not ready to deal with the possible rental issues and there is no outside company that could potentially take this task, it is better to sell.
- If there is a need for cash to make an investment or open a business or buy a home or pay off some high-interest debt, it is better to sell the inherited house and use the proceeds to fulfill the needs.
If an inherited house is located far away from the place where the beneficiary resides and there is no one who can keep an eye on it.
However, when there is no conflict with other beneficiaries, and an inherited house is better than a home where the beneficiary resides, it is better to keep the inherited house and sell the primary residence.
If the inherited property could be used as a second home or vacation home, it makes sense to keep it. If there are no conflicts and after some calculations, it is obvious that converting the house into rental property would generate a good stream of income, it is better to keep the property.
It is very important to know that inherited property gets a step-up basis. This means that there may be no tax due when the house is sold.
If the inherited house is better than where the beneficiary resides, selling primary residence would make more sense.
A person can utilize exclusion on a primary residence and do not pay tax on any gain up to $250K for a single filer or $500K for a joint filer, and at the same time gets a step-up basis on the inherited property.
Once the property is converted into a primary residence, if it will be sold in the future, the beneficiary would be using the step-up basis and if he or she lives there at least 2 years out of 5 before selling it, will get exclusion as well.
In short, decisions should be made based on calculations and personal situations. There is no recipe that fits all.
Should You Get Landlord Insurance for the Property?
If you choose the renting route, you'll need landlord insurance coverage that's separate from your homeowners' insurance policy. A homeowners insurance cover can apply to a house that you consider your primary residence. On the other hand, landlord insurance covers any liability issues or damage to your home when you rent it out to others.
An inherited house comes with increased property damage and liability risks. Choose a landlord insurance policy depending on the type of property you have.
When Would You Need Landlord Insurance?
Sign up for a landlord insurance policy depending on how often you'll be renting out the house. The insurer will want to know whether you'll have a lease for the property. They will also ask for your tenants' insurance history, occupations, names, and date of birth to assess the risk of insuring the house.
You have to decide whether your tenants will require renter insurance too. It would help if you also gave your reasons for renting the property and an accurate figure for the total rental income. It will cost you an average of $1,478 as a yearly premium.
Get landlord home insurance coverage if you need protection against property damage, loss of income, and liability. Property damage may be caused by theft, vandalism, or severe weather conditions, while the liability claims may include legal fees and medical costs.
Get Fast, Affordable Landlord Insurance Today
Once you inherit a house from a loved one, you have to decide whether you'll live in it, rent it, or sell it. Whichever decision you make, it should be geared toward your happiness and peace of mind. You may take some time off to review each of these options based on tips discussed in this guide.
Count on us for affordable landlord insurance if you decide to rent out your inherited property. We'll help you find coverage that guarantees maximum protection against financial losses linked to your house. Get a landlord insurance quote from us in minutes to get started with our coverage plans.
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