When a loved one passes, it can be a difficult time. Not only are you grieving, but now you must get organized and don’t know who to listen to. You might be getting mixed signals and have family members pressuring you. This guide is to help you get organized and make the best decisions possible during this sensitive time.
Documents to Gather:
Life Insurance Documents
Last Will and Testament
Trust / Corporate Documents
Continue Payments: Continue making payments on the mortgage. If you don't know whether there's an outstanding mortgage, or who might hold it, you can check the home's title, which should list the lender. There are a couple of considerations you need to review.
Due-on-sale clause: This means that that the entire loan is due and payable if the borrower transfers the property to someone else, especially a non-family member. This clause may make it necessary for you to either pay off the mortgage in full or sell the property. When family members inherit a property, they can usually just assume the mortgage payments instead.
Reverse mortgage: In a reverse mortgage, which is a financial product popular with older homeowners looking to access their home’s equity without moving, the original owner receives ongoing cash for the equity in the home, repaying the loan upon moving out. Upon the original owner’s death, the beneficiary often has a limited time to repay the amount due — usually six months. You’ll need to pay the balance with your own funds, sell the home to satisfy the loan or get a new loan in your name to cover the amount due.
Underwater properties: If the property you’re inheriting is underwater (meaning more is owed on it than it’s worth), the issuing bank may agree to let you do a short sale on the home, accepting less for the property than the remaining loan amount.
Mortgage paid off by the estate: While the person leaving the home to you may have had a mortgage on the property while they were living, it’s possible that the mortgage was paid off by their estate, and you own the home free and clear.
Discover Your Options: Depending on the Mortgage type, family members, and what was stated on the Will, your decision will need to factor one of the following decisions. Either you sell the property, your rent it out, or you live in it.
Probate: Probate is the passing of the estate to the heirs through the legal system. Anytime you get the legal system involved there are fees and could be disputes. Just because you have a Will in place, it does not mean that you bypass the Probate Court system. Common ways to avoid probate are having a Trust in place (as the owner of the property) and having the Right of Survivorship. Consult your Real Estate or Estate Lawyer to clarify.
Meet with Family: It is important to understand all the options before meeting with the family. Make sure to have reviewed the Will in place and clarified any questions with an Estate Attorney. You should know the value of the property and the rental rate at its current condition
Buyout: If one sibling wants to keep the home and the other wants to sell, one can buy the other out, either in cash or by financing half of the home’s value. Out-of-pocket expenses include closing costs and an appraisal.
Promissory note: If you want to keep the property, your sibling wants to sell and you don’t have access to a mortgage, you can record a promissory note that outlines how you’ll pay your half of the home’s value back to your family (monthly installments plus interest).
Sell and split the profits: Perhaps the most straightforward option, you and your sibling agree to sell the home, pocketing your half of the proceeds after expenses and commissions.
Rent and split the profits: If the real estate market isn’t strong, you may decide it makes more financial sense to rent the property. You and your sibling would pocket whatever profit is left over from the monthly rent, after maintenance and property management costs.
Suit for partition: If stakeholders can’t agree on what to do with a property, you’ll have to get the courts involved by filing a lawsuit for partition, which essentially asks a judge to order the sale of the home. This can be a timely and expensive process, with legal fees lowering the profits you’ll receive far below what you would have pocketed by selling in the first place.
Insurance: Once the owner of the home passes away, the insurance policy on the property should be rewritten. Most insurance companies will allow some time for you to find coverage as long as you stay up-to-date on payments. Be aware, though, that if the house goes into probate, it may be in insurance limbo for a period of time. You can't assume ownership of the house while the property is in probate, so you won't be able to get insurance in your name during that time. To make sure the house is covered, you or the executor of the estate should contact the current insurance company and ask them what your coverage options are
Hire the Right Agent:
If you decide to go down the path of selling or renting out the property. Make sure to choose an agent that specializes in the area you are selling. They will have more insight and possibly a database of buyers and renters already looking in the area.
Determine the Repairs:
If the agent knows the area well, they will be able to guide you on what the typical home in the area sells for and explain to you the condition limitations. The biggest consideration is whether you need to target wholesale buyers or retail buyers in your sale. If you need to target wholesale buyers (investors) because the home repairs are extensive, they will need to purchase at a discount. If the home repairs are not intense and you are close to the home being habitable, then some cosmetic upgrades can help you target the families that will ultimately live there and pay a premium for it (retail buyers).
Uncle Sam is probably your most needy and difficult family member to avoid.
Estate Taxes: In 2021, federal estate taxes may apply if the estate's combined gross assets and prior taxable gifts exceed $11.7 million. Check with your state tax collector for more information.
Capital Gains Taxes: If you decide to sell the home, your profits may be subject to a capital gains tax. The good news is you won't pay taxes based on what was originally paid for the house. The fair market value of a home resets upon the owner's death. So, if your parents bought their home for $50,000 and it's worth $500,000 now, the tax basis of your inherited home is $500,000. If you sell the house for $500,000, you won't have any taxable gains. If you sell it for $550,000, you'll pay capital gains taxes on $50,000.