Inheriting a house can be a complex situation. You may be grieving the loss of a loved one, and figuring out how to handle an inherited house on top of that can be overwhelming. We know, we have been through it ourselves! Since it’s important to understand the process of inheriting a house and the financial consequences of what you choose to do with it, we wrote this post to help you get started. Some of the details are specific to the state of Texas (we are located in Brenham, home of Blue Bell Ice Cream!), but many parts of the process are the same from state to state.
The process of inheriting a house
The Probate Process
There are many possible circumstances under which you can inherit a house, but in Texas all inherited property goes through Probate Court. The court will first use all assets to cover any debts of the deceased, and what remains will go to the people in the will. If you inherit a house in this way and the outcome is uncontested, you will typically get the property in two weeks. The process goes less smoothly if there isn’t a will, in which case the court will determine who is an heir, and more people can contest the judgment.
Affidavit of Heirship
One case where the probate process can be skipped is if the deceased only owned real estate. In this case the heir will simply be awarded an “Affidavit of Heirship,” which is needed to sell the property.
Rights of Survivorship
In another situation, if you are a joint owner of a property and the other owner passes away, you are awarded full ownership of the property automatically without processes or paperwork, through what’s called the “rights of survivorship.”
Another part of inheriting a property is searching for any liens or foreclosures against it, which must be done before selling the property. This is called a title search, and it could reveal hidden debts that are now your obligations. The title search should be taken care of in Probate Court but isn’t usually done with an Affidavit of Heirship.
Naturally, the process is more complicated if there are multiple heirs / stakeholders in the property. In this case there are several options for settling ownership, including:
- Sell the property and split the profits
- Rent the property and split the income as well as the expenses of ownership (taxes, insurance, maintenance, property management)
- One heir pays the other(s) for their ownership interest in a buyout (you will likely need to pay for an appraisal to determine the value of the home). This can also be done over time with a promissory note.
What comes next
Once you’ve inherited the house, you can choose to move in, rent it out, or sell it. There are important things to consider for each option.
Perhaps one of your biggest concerns when you’ve inherited a property is whether you need to pay tax on it. Fortunately, there is no inheritance tax in Texas, but there may be a federal estate tax if the property value is high enough.
Other tax liabilities will depend on what you decide to do with the property. If you keep it to live in or rent out, you will pay annual property taxes (in 2020, the average property tax rate in Texas is 1.83%, and where we’re located in Washington County it’s 1.52 %; there could be additional taxes depending on the district the property is situated in).
If you decide to sell the property at any point, the tax situation is just slightly more complicated. Normally, the sale of a home results in what is called “capital gains taxes”, but inherited properties are protected by a “step-up tax basis” – they are inherited at market value on the date of inheritance, and only gains in value between the inheritance and the sale are taxed. For example, your grandfather may have left you a house that he bought for $50,000 in 1970 and is now worth $250,000. If you live in it for 5 years and then sell it for $275,000, you will only pay taxes on the $25,000 increase during the time you owned it.
(Want to lower your tax liability? Contact us to find out how selling to us can help you do so!)
If there is a mortgage on the house, you will want to factor the specifics of the mortgage into your decision of what to do with it. Sometimes there is an existing mortgage that gets paid off by the estate, and you inherit the house free and clear. On the other hand, it’s possible that the house is underwater, meaning more is owed than what the house is worth. In this case, if you want to sell, you will need to get the bank to agree to what’s called a “short sale,” where the bank allows you to sell at the current market value and repay the loan “short” of the full amount owed. An inherited property may also have a “reverse mortgage,” where the deceased took out a loan based on the value of the home; this loan will need to be repaid, usually within six months.
Finally, you’ll want to consider the level of repairs that the house needs. It might be a good idea to get a home inspection to help you pinpoint any necessary repairs. This is especially important if you want to sell it, since most of the time buyers will ask that issues found during their inspection are addressed.
Alternatively, if you would like to sell the property and avoid going to all the trouble of making repairs and hiring an agent to list the property, you could consider selling to a professional home buyer who can purchase it as-is. Home buyers have experience dealing with inherited properties and can help you navigate the situation by taking on the repairs themselves, taking over mortgage payments, or whatever your needs are. If you are looking for a home buyer in Brenham or the surrounding areas, please reach out to Oak Hill Home Solutions – we would love to speak with you about how we can help!