If you have inherited a home from a loved one, you likely have a lot of questions. For example, how do you get the title, what are the tax implications, and how do you handle an outstanding mortgage?
Learn about the process of inheriting a home, including specifics about tax implications, how to handle inheriting property with a mortgage, and more.
- Inheriting a house and receiving the title often involves probate court unless a trust was put in place.
- In most cases, you won’t have to pay an inheritance or estate tax on a home you inherit from a close relative.
- Inherited homes receive a step-up in basis to a current market value, which can reduce capital gains tax if they are sold.
- If the home has a mortgage, a family member can take it over without being subject to the typical lender approval process.
Getting the Title After Inheriting a Home
If you have inherited a home, you need to take a few steps to fully own it. These steps can vary by state.
In most cases, an executor or personal representative needs to be appointed by the court. Then, the estate may need to go through the probate process. Once the court authorizes the executor or personal representative to distribute the property, they’ll file the paperwork necessary and transfer the title to you.
Here are some common steps heirs may be required to take, depending on their state laws, after the death of a homeowner, according to Florida probate attorneys Anthony Cetrangelo Jr. and Gregory Herman-Giddens:
- Obtain a copy of a short form death certificate.
- Obtain the original will of the decedent.
- Deposit the original will of the decedent with the court.
- Verify the last deed on record only had a sole owner on it.
- Determine if the home was considered homestead property, which can affect its taxation.
- Meet with a probate attorney to determine if a petition to determine homestead status of real property or another avenue is appropriate to pass title.
- Hire an attorney to assist in probate court and obtain court orders if necessary.
- After going through the probate process, receive the document that vests the home's title in the beneficiaries/heirs (such as an order determining homestead, an order of summary administration, or a personal representative's distributive deed).
If no will exists, intestacy laws in the state where the owner lived will determine who inherits the assets.
Depending on how the original homeowner has structured their finances, the probate process can possibly be avoided. Attorney and counselor-at-law Nancy Hermansen said, “In California, it’s significant to place your home in a trust to avoid probate for your heirs because probate in this state is long, expensive, and public. If there is no trust, the most common way to transfer property is to go to court. With a trust, it’s a much more simple process.”
Taxes After You’ve Inherited a House
What are the tax implications of inheriting a house? It’s always best to consult a tax attorney about your specific situation, but here are some of the common taxes people face when they inherit a home.
An inheritance tax is typically a percentage of the value of an asset you inherit and is based on your degree of kinship to the person who passed. While the federal government does not currently charge this tax, six states do: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
However, exemptions are often made in these states for immediate family members. For example, Kentucky has an inheritance tax that varies from 4% to 16%, depending on the beneficiary’s relationship to the deceased person. Beneficiaries who are the closest family members (surviving spouses, brothers, sisters, parents, children, and half-siblings) are exempt from the tax.
To find out your state tax liabilities for inheriting a house, check your state laws or consult an attorney.
Estate taxes are taxes charged to the estate of a deceased person to transfer their property at the time of death.
The executor of the estate is generally responsible for filing the return (Form 706) and paying any tax due. When there’s no named executor, the responsibilities can fall on anyone in possession of the decedent’s property.
A federal estate tax does exist; however, it is not common. Estates are only taxable at the federal level and only require the filing of an estate tax return if the gross value exceeds the limit set by the IRS for that year. In 2021, the limit is $11,700,000 per person.
At the state level, 12 states and the District of Columbia currently levy an estate tax: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. However, if an estate’s gross value is less than the state’s set limit, it is exempt from the tax, similar to how federal law works.
When figuring out if an estate is taxable, consider both federal and state laws.
Capital Gains Tax
What if you want to sell the house you inherit? When you inherit a home, the current fair market value (FMV) will be assessed by the IRS.
For example, say that the previous owner bought the home for $150,000, but now it’s worth $320,000. You would take over ownership at the current valuation of $320,000. This is known as the “step-up in basis.” If you end up selling the home for more than $320,000, you would only be subject to taxes on your profits above the $320,000.
If you live in the home you inherit as your primary home for two of the last five years then sell it, you can qualify to exclude up to $250,000 of your profit from your income.
Once you are the owner of an inherited property, you are responsible for property taxes. The amount of your taxes may be reassessed to reflect the updated fair market value. Check your state laws to find out if you can expect a reassessment.
Inheriting a House With a Mortgage
How does inheriting a house with a mortgage work? The good news is the full balance won’t become due immediately if you’re a relative. If a borrower dies and their relative inherits their home, federal law prevents lenders from demanding the loans be paid in full. With that in mind, you have a few options:
- Take over the loan payments: Heirs who are relatives can be named as the new borrower without being approved through the traditional mortgage process. You can then move in or rent out the home.
- Pay off the loan: You can pay off the loan using your assets or others received as part of the inheritance to own the home outright.
- Sell the home: You can sell the home, pay off the mortgage, and keep the gains (less taxes on profits over your stepped-up basis).
If you are not a relative of the person who passed, the mortgage balance may become due immediately. You’ll want to check on the rules with the lender.
Unlike a regular mortgage inherited by a relative, a reverse mortgage has to be paid off when the last surviving borrower dies. So if the home you inherited has a reverse mortgage, you’ll need to pay it off. You could sell the house, pay off the reverse mortgage with your assets, or take out a mortgage to pay it off and keep the home.
Similar to the step-up tax basis of the market value of the house when you receive it, you’ll also receive the same benefit for any property you inherit. That means if you inherit land, for example, its value will be based on the fair market value at the time of the decedent’s death. You may keep it, rent it out, or sell it. The tax implications will follow the same laws that apply to homes.
Frequently Asked Questions (FAQs)
What are the tax implications of inheriting a house?
When you inherit a house, you will be responsible for the property taxes, which may be reassessed based on your step-up in basis, depending on your state and situation. Beyond that, there is no federal inheritance tax, but you may be liable for state inheritance tax if your state levies it. State and federal estate taxes are rare as they only hit estates above the exemption limits, which are generally much higher than the average person’s total net worth.
Only about 0.1% of the people who died in 2020 were expected to pay estate taxes.
What is the process of inheriting a house?
When a homeowner dies, their estate will need to be settled. If they did not have a trust, the process will likely involve probate court. Once the executor or personal representative disburses the assets, you will receive the title to the home. At that point, you may need to take over or replace the mortgage if you plan to keep the home. Otherwise, you may want to prepare the home to be sold. You will receive a step-up in basis, which will likely reduce your capital gains tax if you sell the home.