You just found out you inherited a house – congratulations! But before you pop the champagne, consider the legal aspects and tax consequences of your inheritance and know what to expect.
You Must Act Like an Owner
You’ll have to clear the property title to effectivel shows that you are the rightful owner of the property. This is a relatively easy process for spouses, but it becomes more complicated for non-spouse beneficiaries and for multiple beneficiaries. The processes to clear the title vary by state, so contact an attorney in your state to help you through the process.
Once you have staked your claim as rightful owner, take responsibility as the owner immediately. If you don’t, you could risk making matters more complicated. This means: You must pay annual property taxes. You must get property insurance (or be sure to put the old insurance in your name). And if there’s still a mortgage on the property, you must continue to pay it.
Be aware that the “due-on-sale” clause, which is very common in mortgage agreements, allows mortgage lenders to call in the full loan amount when the property is transferred to you. For spouses, children, and some other relatives and tenants, the lender is not allowed to force the repayment upon the death of the owner. But if you don’t fall into one of these categories, you could face this issue, in which case you’ll need to assume the old loan, get a new loan, or negotiate the full payment amount.
You Must Pay Some (or a lot of) Taxes
Whether you will owe inheritance taxes or estate taxes (aka “death taxes”) on your inherited property depends on where you live and how much the estate is worth. First, the difference between the two: estate taxes are assessed on the estate of the deceased, while inheritance taxes are collected from the individual who was a beneficiary.
Federal Estate Taxes
As of 2014, estate taxes at the federal level must be paid on estates assessed at a taxable value over $5.34 million. Above this amount, the maximum tax rate is a hefty 40%.
Generally, surviving spouses do not have to pay estate taxes on inherited property, and can even take advantage of “portability” to claim their spouse’s unused exemption amount. But this is true only if the surviving spouse is a U.S. citizen. Non-citizen spouses are subject to different inheritance laws and will not inherit the estate free and clear.
If it is the deceased who is not a citizen, but a non-resident alien, his or her exclusion will be a mere $60,000. However, if the deceased was a citizen of a country that shares an estate tax treaty with the U.S., the estate tax laws will be more favorable to his or her beneficiaries.
Even if you do not owe money on the estate – which is due nine months after the death of the estate’s owner – you may wish to file an IRS Form 706 anyway, for a variety of reasons. Speak to a tax accountant and estate planning attorney in your state to discuss this option.
State Estate and Inheritance Taxes
Like federal estate taxes, these taxes are levied on the taxable portion of the estate of the deceased. And, like federal estate taxes, you may wish to file a return on state estate taxes even if you don’t owe money.
Currently, more than a dozen states have estate taxes, while fewer have inheritance tax laws on the books. Maryland and New Jersey are the only states to collect both.
The exemption amounts, maximum rates, and due dates vary greatly, so check the laws in your state. Also know that laws regarding these taxes change often. They can disappear for years at a time and come back suddenly, so be sure you know the most current laws in your state when you are inheriting an estate.
You May Choose to Sell…
There are many reasons to want to sell the property you’ve inherited; perhaps you don’t want the hassle of being a homeowner, or you’d like the cash, or you need to sell in order to cover the estate taxes due. Whatever the reason, consider the following issues.
Capital gains taxes must be paid on the taxable amount of money made – the profit – on the sale of a home. Capital gains are figured by subtracting the cost basis (usually, what was originally paid for the item) from the sale price. For houses, that price could be very large, especially if it was purchased a long time ago. But when someone dies and leaves their house to someone, the cost basis is not what the house originally cost, but what it cost when the person died. That means that a beneficiary selling the house within a relatively short time frame after inheritance is likely to pay low capital gains taxes. (And if it’s a loss rather than a gain, up to $3,000 can be deducted as a loss against income on the individual’s tax return.) Have the property assessed soon after the death of the owner to determine the cost basis.
…Or Disclaim Your Inheritance
If you don’t even want to sell the property – or maybe you want to but you don’t think you can – you can choose to disclaim the inheritance. Just because someone leaves you something in their will doesn’t mean you’re obliged to accept it. To disclaim an inheritance, put it in writing within nine months (which happens to be the same time federal estate taxes are due), and be sure that you’re sure. Once you’ve disclaimed the property, you can’t get it back.
Disclaiming can occur under dire circumstances, but it doesn’t have to. It can also be a form of “postmortem estate planning” that can save a family a lot of money, depending on the situation.
Contact an Attorney
If you’ve inherited some property and are facing any of these issues, it’s a good time to speak to an attorney in your state who is familiar with them. You might also want to speak to a financial advisor and a tax planner.
This is also a good time to think about your own estate plan, what kind of issues your named beneficiaries will face when you pass, and what you can do now to reduce the stress they will experience in settling your estate. After all, they will already be mourning your loss; don’t make them deal with endless red tape, too.
