When a parent, relative or close friend leaves a house to a child or loved one, it can sometimes be a “mixed blessing.” While the intention is certainly a good one, whether the “gift” is a benefit depends on a wide range of matters.
Is the house in good condition? Is it in a good location? Is there only one beneficiary? Does the beneficiary want to live there, rent it or sell it? Is there a mortgage? And of course, there are family dynamics and emotions to consider as well.
If you find yourself in this situation, it’s good to know you have choices and that as certified public accountants, we can help. Together we can evaluate the federal and state tax implications, as well as the potential tax impact of rental income, should you want to rent it, or capital gains, if selling the property is your better option.
Let’s look at taxes first. There’s something called a “step up” in basis, which essentially means, if the property was in the deceased’s name at the time of death there’s no federal tax on the appreciation in value from the time the house was bought until the time of death, financial experts say. For instance, if the property was purchased for $200,000 and is now valued at $400,000, the federal government won’t tax you on the $200,000 difference.
In another scenario, if you have the home appraised shortly after your loved one’s death and then sell it after you’ve lived there for two of the last five years you can receive another financial benefit of a $250,000 exclusion from capital gains tax when you sell.
When it comes to state taxes, in Pennsylvania there’s a 4.5 percent inheritance tax for children who inherit property. That inheritance tax, however, could be paid by the estate, providing that is what is indicated in the deceased’s will.
If you decide you want to keep the home and there’s a mortgage on it, you may have to refinance it in your own name. You will need to ensure a lender that you can make the payments, including property taxes and homeowner’s insurance.
If you decide to sell the property, you may want to consider using funds from the estate for improvements or maintenance to get the property in good shape to attract the best price. Whenever there are other beneficiaries involved, it’s always advised that a group decision is made about how much to spend from the estate to update the home.
Frequently, a home is left equally to all of one’s children. And, sometimes, one wants to “buy out” the others. In order to do that, an attorney can draw up a legal agreement that fairly represents each person’s interests.
Whatever situation may best suit your needs, it’s valuable to know our firm is here to assist you with all of your accounting concerns and questions. Please call us to make an appointment or discuss your questions on the phone.