Things To Know When You Inherit Property

Inheriting a home is a complicated process, and one that can come with emotional, legal, and financial uncertainty. While this inheritance is likely to be a financial windfall, understanding your new rights and responsibilities is key to protecting your new asset and moving forward after inheritance. Depending on the legal process by which the home is inherited, the number of individuals sharing in the property, and the relationship between the decedent and the heirs, complex legal questions can seriously affect the value of the home.

Understanding the most critical things you should know when you inherit property can help to avoid common pitfalls, maximize the value of your new asset, and can take a great deal of stress off of your shoulders at a time that is already difficult for most families.

Tax Implications Of Inherited Property

All inherited assets, including a home or property, come with a new set of tax implications. Consulting with a professional to understand and meet your new responsibilities is a must. First, it's important to remember that as the new owner, you are assuming the property tax obligations associated with the property. 

Estates in excess of the IRS exemptions to estate tax (in 2022, estates of over $12,070,000) are subject to estate tax liability. In Illinois, state estate tax applies to estates exceeding $4 million in assets. These tax implications fall on the estate, however, not the heirs, and are settled before any distributions of property are made. There is no federal or state inheritance tax that applies to property once inherited.

If and when you decide to sell inherited property, any profits on the sale will be taxed as capital gains tax. Importantly, the value of the property for the purpose of calculating capital gains taxes is set as of the date of the decedent's death. That is, if the original owner paid $50,000 for a home, it was worth $300,000 at the time of their death, and you subsequently sell the home for $325,000, only $25,000 is taxable as capital gains.

Insurance On Inherited Property

It's vital for the estate's executor or heirs to carefully review the homeowner's insurance policy on the home. Most insurance companies will allow some time — usually 30 days — for heirs to obtain a new homeowner's insurance policy on the property, although some will let the current policy remain intact until it expires if the new homeowner stays up-to-date on payments. Heirs should be aware, though, that if the house goes into probate, it may be in insurance limbo for a significant period of time. No one is able to assume ownership of the house while the property is in probate, so a new homeowner won't be able to get insurance in their name during that transitional period. To ensure the house is covered, the heirs or the executor of the estate should contact the current insurance company and inquire as to coverage options. Short-term homeowner's insurance while the home is in probate may be pricey, especially if the home is vacant, but ensuring continuity of coverage — and protecting the home — is essential.

Inherited property likely also carries an owner's title insurance policy, protecting against title defects at the time the property was purchased. Because owner's title insurance is a one-time payment, the owner's title insurance policy will pass with the property to any heirs or legal beneficiaries of the property. It is important to note that title insurance only protects against defects that existed at the time the policy was purchased, however, and any liens or other encumbrances against the property must be sorted out by the estate. 

Mortgages Or Loans Against Inherited Property

If the property is inherited subject to an existing mortgage, it's important to review the loan documents to understand what type of mortgage is in place and whether that loan obligation is "due on sale" or assumable. Most mortgages can be assumed by the mortgagor's heirs, meaning the heirs can either choose to refinance or simply take over payments according to the original loan terms. 

However, some loans, like reverse mortgages, specifically state that the unpaid balance is due on sale or when the mortgagor passes. If the property is subject to this type of obligation, it may be necessary to sell the property to satisfy the debt. 

The property may also be subject to liens or other encumbrances. Heirs may wish to run a title search on the property to understand the extent of any liens or other outstanding debts secured by the home. These types of obligations typically pass with the property, so heirs should understand the full extent of their potential liability before taking possession of the home. 

What To Do With Inherited Property?

As with any asset, someone who inherits a piece of property has several options — the property can be occupied by the heir, sold, or rented out to a third party. If several heirs are bequeathed the same piece of property, a discussion among the relevant parties can help to determine the best course of action. If the relevant stakeholders can't agree on how to manage the property, one or more of them can file a lawsuit for partition, which essentially asks a judge to order the sale of the home. This is generally considered a last resort, as it often results in ill will and an expensive battle that reduces the available inheritance available to all heirs.

When Home Means More, You Need A Team With More To Offer

If you've inherited a home, it's important to understand your options, and a real estate professional is a great place to start. That's why your local Baird & Warner agent is with you at every step of the way, from understanding your options, to preparing your home for sale, to connecting you with local experts in mortgage and title. Whether it's the beginning of a story or the end of a chapter, we're here to help.