Generally, there are three options for when you inherit the family home. These options include – live in it, rent it, or sell it. If you’re unsure about how to handle the newly inherited house then entire process can be overwhelming.
Taxes on an Inherited House
For tax purposes, the IRS treats an inherited house as an asset like inherited stock. This means you get a tax benefit from the inherited house. When you decide to sell the house, the capital gains on the sale of the property would be based on a “stepped up” cost basis (the fair-market value at the time of the decedent’s death) and not the decedent’s original purchase price. For example, if your dad purchased the house for $100,000 in 1980 and its fair market value of the house at his death in 2017 was $350,000, the capital gain would be the difference between that updated amount and the sale price.
Living in the House
If you live in the house, the tax treatment will change if you live there for at least two years. If you later sell the property, you would be permitted to use the current capital gains exclusions on primary residences if you lived there for at least two years.
Renting the House
Choosing to rent the house can provide some additional monthly income. However, this can be a hassle with maintenance, tenant payment, and retaining tenants. Some heirs will hire a property management company that takes over many of the duties of the landlord.
Selling the House
When selling an inherited property, keep in mind that it may take a while to prepare the house for sale. If there is a mortgage on the property, that debt will either need to be paid off or the proceeds from the sale of the property will be needed to satisfy those obligations. If the property is underwater (the amount of the mortgage is greater than the market value of the property), then it may be best to discuss a short-term sale with the lender.
What If I Don’t Want The House?
If you do not want to deal with the property at all, you do not have to accept the gift.