7 Things that may surprise you when you inherit a house

7 facts that you probably didn’t know about inheriting a house

It’s never fun when a parent, relative or loved one dies.  When you inherit a house as part of the estate, there’s now a whole new level or responsibility (and at times stress).  Most people (thankfully) don’t go through this very often.

7 things that may surprise you when you an inherit a house on Long Island

Because this generally only happens once in a lifetime, most of us aren’t well versed on how to deal with an inherited house and all the legal nuances that come along with it.  And, furthermore, it happens during a time of grief and just being in the house can sometimes may things more emotional and more difficult.

 

7 things that may surprise you when you inherit a house on Long IslandYou’ll want to make the decision as to what to do with the house – if you want to sell it, rent it or live in it.  Each have pros and cons, and the best answer will differ based on your/the other beneficiaries needs.  In case it helps, you may find this guide useful as it walks you through the entire process from start to finish:  How to sell a house to settle an estate.

 

I wanted to share some advice when it comes to dealing with and selling an inherited estate, that many people don’t realize.  You may know some of these items, but some may come as a surprise.  It’s better to know these facts at the beginning, and it’s also advisable to consult a CPA as well as your estate attorney.

 

7 things that may come as a surprise when you are managing an inherited house on Long Island

 

1.  Existing debt still needs to be paid off, even after someone dies

When someone dies, their debt is managed by the estate.  So, if someone still owes money on their mortgage, has credit card debt, or still owes money on their car, or has other expenses, these expenses are still owed.  The money will come out of the estate, and it will therefore reduce the net proceeds to their heirs.

 

The estate is everything the person owned on the date of their death. This includes liquid assets (e.g. bank accounts, stocks/mutual funds, retirement accounts, etc) as well as non liquid assets (e.g. house, car, artwork, furniture, jewelry, etc.)

 

suprises you may find when you inherit a house on Long IslandThe process of paying the remaining bills and distributing the leftover is called probate.  This process is managed by the executor (or executrix, if the person is female).  This person is usually named in the will or else is appointed by a judge and this person will manage the assets to pay off the debts.  This may mean  making minor improvements to the home prior to selling the home and continuing to pay the bills to electricity/heat, etc until the house is sold.  In some cases, ongoing bills can be paid via liquid assets; in other cases, the house must be sold to cover the remaining debt.

 

When there aren’t enough assets to cover the debt, some creditors are out of luck.  If there is still a mortgage on the house, generally, the bank is the first creditor to get paid (that’s why it’s called a 1st mortgage), and that would be followed by the 2nd mortgage/home equity loan, etc. (if there is one).  Other items, such as credit cards are considered unsecured debt and are lower on the totem pole.  There are principles to the order for things to be paid and the executor will need to follow these rules.

 

Important takeaway:  You need to make sure that payments are still made, especially if there is an existing mortgage.  The debt is not forgiven until it’s paid off or the estate runs out of money.  And, this takes priority vs the inheritance that the beneficiaries receive.  You can read more about the specifics and exceptions (e.g. when there are joint owners, loan co-signers, etc) here.

 

 

2.  You may get a large tax benefit (and avoid a large capital gains tax) if you sell the house

surprises when you inherit a house - Nassau and Suffolk counties NYWhen you own your home, and you sell it, you usually need to pay a capital gains tax.  This tax is based on the selling price minus the price the house was purchased for minus any capital improvements you made to the house.  If you are single, you get a deduction of $250,000; if you are married (at the time of the sale), you get a deduction of $500,000.  Beyond that, you need to pay the capital gains tax on the difference.  Here on Long Island, where we have high property values, that can be large sum.

 

Often, when you’ve inherited a house, especially if it was your parent’s house, they may have lived there for a long period of time – possibly 30 or more years.  For some, that may even be 40-50 years.  Over that time, a house can appreciate a lot.

 

For example, my parents bought a house in the early 1970s in a wealthy neighborhood and only bought the house for $30,000.  Today, it’s probably worth more like $850,000 – $900,000.  So, if they sold it now, they would need to pay capital gains tax on around $270,000.  This is using an assumption it sells for $900,000 and they made $100,000 worth of capital improvements during their 45 years in the house.  ($900,000 selling price-$30,000 purchase price-$100,000 for capital improvements – $500,000 marital deduction = $270,000.  Now I’m not sure what their house actually will sell for, nor how much they spent on home improvements, but you get the idea.  But, if they sell it after one of them dies, but the other is still alive, that person would pay taxes on $520,000…a much larger amount (obviously).

 

But, if the house is inherited after a death, the clock is reset for the capital gains.  The cost basis , would be on the date of death (not the original purchase price).  So, while the capital gains exclusion does NOT apply to heirs of an estate, the clock is reset, so that the capital gains (for most) will be SIGNIFICANTLY LOWER.  This especially works to the heir’s benefit if the house is sold quickly, before it has time to appreciate.  So, if they died and my brother and I sold the house very quickly, our capital gains tax might be zero or very close to that.

 

 

3.  But, you could get hit with other taxes (pending on the state where the person lived (or if it is a very large estate)

surprises when you inherit a home on Long IslandMany people ask about whether they need to pay an inheritance tax.  The majority of Americans do not need to pay an inheritance tax as the Federal Inheritance taxes apply to estates that are currently above $5.43  million in assets (as of November 2017).  Please note that assets of an estate include EVERYTHING – Money/liquid assets, as well as the value of the house, cars, artwork, jewelry, and other valuable items.

 

If the estate is below this $5.43 million threshold, you don’t have to worry about a Federal Inheritance tax.  HOWEVER, depending on the state where the person lived, you MAY need to pay a STATE Inheritance tax.  These taxes vary by state, and some are substantially below this threshold.  For example, New Jersey charges an inheritance tax for values above $675,000 and Massachusetts and Oregon begin at a $1 million dollar threshold.

 

Also, most states, including NY have various small taxes when you sell a house.  Here in New York State, there is a transfer tax of $.400 per $1000.00 of sale price.

 

Another tax to consider is the property tax on the home. Many seniors have exemptions that were incentives to keep them here on Long Island.  These incentives disappear upon the date of death of the senior homeowner.  Many heirs don’t find this out until they get  a huge tax recapture bill at the time of closing of their deceased parents’ home.  Depending on how long you wait to sell the property and what the additional property taxes are, this can add up to thousands of dollars of unexpected cost at the time of closing.  Check your property tax exemptions at the earliest opportunity to avoid this unpleasant surprise.

 

4.  Even a “free” house can still be costly to maintain…and this can reduce an inheritance

maintenance for an inherited house on Long IslandThere’s no such thing as a free lunch, and this certainly applies here as well.  Owning or managing a home can be expensive, especially here on Long Island even if you’re not paying a mortgage.  You still need to pay real estate taxes, home insurance, heating/electricity/water and many maintenance costs (e.g. mowing lawn, raking, plowing/shoveling the snow).  In addition, there are often ongoing repair and replacement costs.

 

We calculated that here on Long Island, it generally costs an average of $20,000 every 6 months (or $40,000/year).   You can read more about that here:  How much does it cost to maintain a house on Long Island?  We chose 6 months as an increment, because many choose to sell an inherited house, and you can safely assume that it will take at least that long to sell it.Mmany spend an additional 6 months to clean out and prepare the house during the probate process.

 

These costs are important to understand as they may impact whether you want to move in, rent it or sell it.  And, if you’re going to sell it, it’s important to understand the ongoing monthly cost…as it may impact the need or desire to sell sooner rather than later.  Many people mistakenly just think about the net return that selling a house will provide, but ignore the ongoing maintenance costs (which can reduce your inheritance).

 

And, of course if you stay in the house for a long time (e.g. if you move in or rent it), you’ll have other maintenance/replacement/repair costs such as roof maintenance/replacement, appliance servicing/replacement, repainting the exterior, wear and tear on floors and other items (especially if you are renting it).

 

 

5.  An inherited house takes a lot of time to clean out; it’s not “move in ready”

Many underestimate the time it takes to clear out and prepare an inherited house for the market.  If the house hasn’t been maintained well, it’s even more challenging.  And, of course, it’s emotionally draining.  You may find these 2 articles helpful in managing the process:

 

 

Yes, this process can be emotionally draining and it will likely stir up many memories, and remind you of your sadness and loss.  Many find they can’t handle the stress  and memories that come with cleaning out an inherited house, so they put things off and do nothing for months…or even a year.  THIS CAN BE VERY COSTLY.

 

 

6. If you and your siblings can’t agree, it can create major family rifts…and, you may need to involve the court

7 facts that may surprise you about inheriting a house on long islandAt times, managing through this process can be extremely  frustrating if you don’t agree with your sibling(s).  Emotions are heightened and there is often a bit of sleep deprivation, so we can easily over react to things                                                                                                                                                                                                                                                                                                                                    .

 

The first decision is what to do with the house – will you sell it, rent it or move in?  This may depend on each individual’s life and financial circumstances. And, sometimes goals and interests conflict.  One may need the cash from a sale, while the other is sentimental and wants to keep the property.

 

One of you may want to sell the house, while the other wants to move in it.  This is actually fairly simple to solve…one moves in, you get an appraisal and that person buys the other out.  But what if 2 or more of you want to move in?  Or what happens if the one who wants to move in doesn’t have enough money to buy the other one out?  You can see where this is going as there are many problems that could arrive.

 

You are best off trying to resolve things with your siblings amicably, objectively and quickly.  If you and your sibling(s) can’t reach an agreement, you’ll probably have to involve the court.  And, of course this will cost extra money and cost you extra time (see point #4)…the longer it takes to agree, the more it will cost you.  And, yes, if you inherit a house and your siblings are adamant about selling (because they want to take their cash out of the property immediately), they might be able force you to sell the property.

 

Of course, once you get through this first step, you also need to agree on a slew of other things including choosing to sell the house to an investor or through a real estate agent; choosing which investor or agent to do business with; choose which home improvements you want to make (if any), what price to list at, etc.  Do your best to remain calm and objective.

 

 

7.  You need to convert the home insurance policy to VACANT home insurance

 

oops - surprises you may find if you inherit a house on Long IslandOne common mistake that many people make when they inherit a home is realizing that they need to convert the home insurance policy to a vacant home insurance policy.  Many find this one out the hard way, so don’t let it happen to you.

 

Vacant homes tend to have more damage (both because they get broken into more often and also because leaks/other problems tend to go unnoticed for a longer period of time (since no one is living there).  Vacant home insurance does cost more (often 1.5 to 3 times as much).  If a home is vacant for 30+ days, most insurance policies will NOT cover any sort of damage, regardless of cause, unless you’ve converted the plan.  So don’t be penny-wise, pound-foolish.

 

Does this sound overwhelming?  Do you need a faster way to sell your inherited house on Long Island?

It’s definitely not easy.  In fact, it’s one of the most difficult things we need to do in life.  If you feel overwhelmed by the process, or if you’re in a tight financial situation and just need to get the cash and put this behind you, we can help!  There’s definitely an easier way.

 

We buy houses on Long Island for cash!

we buy houses for cash on Long IslandWe can help you speed up the whole process so that you can get your inheritance quickly.  And, we can help you bypass the dreaded process of emptying out your parent’s house.  We will take care of all of this, as we can buy the house “as is.”  We can even close in 2-4 weeks.

 

Other useful articles after you’ve inherited a house:

 

Do you need to sell your Long Island house quickly?

selling your Long Island home - surprises when you inherit a houseSince 1998, we have been a trusted source for the latest information in regards to selling your home fast for cash on Long Island. We will have an honest conversation with you about the benefits and disadvantages of a quick cash sale of your property. If it is not right for you then it will not be right for us. It must be a win-win situation.

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7 Things that may surprise you when you inherit a house | Long Island NY

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