Something happened to someone close to you and you now own a property.
A family member, friend or an estate established that you should be the owner of this piece of real estate.
You inherited a house or property, that comes with a lot of new responsibilities, and you don’t know what to do.
What options do you have?
What you can do with this inherited property?
Your first issue is dealing with the emotional aspect of this new found responsibility. It is quite common to feel both a degree of guilt and a feeling of elation about this new found gift. So we have some serious concerns to deal with:
- How much liability do you now have because of this new property?
- How will you handle protecting and insuring it?
- How much will you owe in taxes by inheriting it?
- Who is going to maintain it? Cut the grass? Collect the mail? Preserve the property?
- What about all the contents? Outstanding bills? Utilities, and so much more?.
1. Move into it as a Primary Residence
If the property is a single family home and it is located close to where you presently live you have option 1. This option makes handling the estate easier and dealing with the property on a more personal basis.
So some questions you might ask yourself: Is this a property you would consider living in?
Even if the house is dated it might make sense to engage a remodeler, and update the property to suite your needs, and occupy the property.
This option allows you to maintain that strong emotional connection you had with the previous owner. It also provides you with a new home to occupy.
This option works “IF” the inherited property is convenient for occupancy as a primary Residence.
2. Use the property as a Second Home or Vacation Home
You inherited a property that is not where you work and presently live, but the house is in a location where you enjoy traveling to because of family or friends in the area.
This solution allows you to convert the property into a second home, or a vacation home.
A person can use a second home as a tax deduction, if it is over 50 miles away from their primary residence.
This makes a lot of particle sense from an emotional basis for you as the inheritor.
You can retain those warm memories of the house and the previous owner and still have the use of it for vacations and trips or use it as an occasional guest house.
3. Use the Property as an Income Producing Rental property
The house or property is an asset and something that might be able to be used as an additional income stream for you as the inheritor. The IRS offers tax deductions for vacation and residential rentals.
In this case, no matter if the property is very close or even far away, it can be utilized as an income producing rental property.
- If it is close and you feel that you are capable of leasing and managing it yourself, you can become an active landlord.
- If it is not close or if you are not comfortable handling those management duties, it easy to find a professional realtor who can help you lease and oversee the property.
Either way this creates an income source for the inheritor.
4. Sell the Property for Cash
So the property is not something that you can use personally or that you want to keep as a vacation home.
The next option is to dispose of the property. The first choice is to sell the property.
Now you need to see what it will take to make that property ready for sale.
You can offer it “AS IS” for a reduced price and not have to mess with it further. Of course, this option will bring you the lowest price for the property.
Next you can have the house inspected by a professional and see what repairs might be necessary to increase the value. This will require you spend some additional money to inspect and correct the issues.
I suggest optimizing the property, to achieve the highest possible sales price for the property. However, optimization requires a strong capital investment.
With each step you may increase the sale price and might even increase the net income received. It will all depend on how anxious you are to dispose of the property, and how financially capable you are of investing in the improvements.
5. Use the Property as a 1031 Exchange Vehicle
Owning a property means you have an asset. That asset has a value, and certainly can be sold. But there is another option that is used to help you trade the property and possibly save you on paying the capital gains tax.
The property can be traded or exchanged under Rule 1031 of the IRS Code.
What this means is that you offer your property to someone for the market or appraised value to another property owner, who is looking for a property in your area. This person in turn has a property that they wish to divest themselves of and it is of a similar value (or if it is more or less the difference can be addressed by paying the difference).
You must use a 1031 Exchange specialist for this type of transaction but it will allow you to gain a property that is more suitable for their needs or closer to your area.
6. Use the Property as a Tax Donation
Now we know that selling the property is not an option, keeping the property is not a solution because of costs or interest. Trading the property will not meet you needs or plans. What else can we do?
We can donate the property to a charity, and receive a tax credit.
Donating the property to a recognized 501c nonprofit is a nice way to help others and receive a tax credit that you can use for your income taxes.
7. Use the Property for Long Term Income by Selling It, and Holding the Mortgage.
You don’t want to pay the high taxes of selling the property outright, you don’t want to worry about being a landlord and you don’t want to donate the property to a charity so what are your other options?
You can sell the property and hold the First mortgage yourself. This action will allow you to have an asset that will pay you long term through fixed scheduled payments.
Payments can last from as short as 5 years with a balloon amount at the end of the term or as long as 30 years on an amortized mortgage basis. Use an amortization calculator to checks payments on fixed interest loans.
You still hold the asset legally and can use it like an annuity for a steady income stream.
There are risks of the buyer defaulting on the note. However, the asset will remain and can be resold if the buyer defaults.
8. Gift the Property to a Relative or Friend
When all else fails, and none of the previous options seem to fit your wants or desires, the final option is to give the property as a gift to a relative or friend.
This is an act that can be very rewarding in itself. There are some tax ramifications for the party receiving the gift based on the value of the gift.
You can reduce taxes by placing the property in a family trust.
Need More Help?
These are broad descriptions of the options available to you.
Each property and each situation is unique and we advise you seek both legal counsel as well as advice from a tax professional as well.
Please contact me for additional information, or to schedule a private consultation.