When a loved one dies, the last thing you need to worry about is who inherits what. A will helps sort things out. If you don’t have one now, it’s highly recommended that you put one together. After a death, a person’s property enters probate. What is that and what should you expect from the process?
What is Probate?
The official process of handling a deceased person’s estate is called probate. This process includes proving the validity of an existing will and naming the executor (usually selected by the deceased in their will). The executor applies for a Grant of Probate to handle the distribution of money and property. They provide an accounting of all assets, money, and possessions as well as outstanding debts and taxes. Once any outstanding debt gets paid, the executor distributes what remains according to the deceased last wishes (as laid out in the will). If someone dies without a will, the state takes over settling the estate.
I Inherited a House. Now What?
During probate, you find out that the deceased left you their home in their will. You have a few things to think about. First, consider the financial obligation involved with owning the house (property taxes, upkeep, liens, etc.). Then, find out about the federal estate taxes and possible capital gains taxes. Finally, decide whether you want to move in, rent it out or sell it. If you have siblings that also inherited a percentage of the property, you all need to decide what to do together.
At the time of the writing of this post, no federal inheritance tax currently exists. However, some states require that you pay taxes on inherited property. Fortunately, Florida isn’t one of them. Capital gains taxes apply only if you decide to sell the house. In certain circumstances, you might qualify for a capital gains exemption. If that happens, you only pay taxes on any amount earned after the first $250,000 profit (for individuals) or $500,000 (for married couples filing jointly). However, the property must be used as your primary residence for at least two years and you can’t have used the capital tax exemption any time in the two years before the house sold.
Let’s say the deceased purchased the property for $60,000 years ago. It was paid off at the time of death. The IRS assigned a fair market value to the property based on current stats. If the property is worth $250,000 at the time you inherit it, then you are responsible for capital gains on anything you receive over that amount when you sell it. Talk to your tax attorney or your financial advisor about capital gains taxes before you sell.
Taking Over a Mortgage
Let’s say the house still has a mortgage due. Some mortgage companies allow the inheritors to assume the mortgage. Others require the mortgage to be settled upon the death of the mortgagor. That falls on the shoulders of the inheritors to settle. Sometimes, this might force you to sell in order to pay it off.
Move In, Sell or Rent?
Whether you move in, sell the property or rent it out, each option comes with its own pros and cons. When you move in, you assume all the responsibilities of its upkeep, property taxes, any mortgage due, insurance, and other costs involved in owning a home. If you sell it, you must continue paying any mortgage due until it sells as well as capital gains taxes after it sells. You also pay for any expenses involved in fixing it up to sell it and all costs involved in the sale (including agent fees and closing costs). When you rent it out, you no longer qualify for a capital gains exclusion. The earned income from renting it out does get taxed at a lower rate. You also become a landlord. If you choose this route, you might want to hire a property management company to handle vetting renters, collecting the monthly rent and any deposit due, scheduling repairs, etc. Make sure to roll the cost of this service into the monthly rent.
In Florida, probate for a simple estate usually takes around three months. For any property worth between $100,000 and $1,000,000, it costs $3000 plus 3% of the property’s value over $100,000, according to Nolo. Seek out the advice of a tax attorney, accountant, or financial advisor before deciding how to proceed with inherited property. They can answer any questions you may have about the financial implications of it.