What to Know About Inheriting a House

Stacie Dobbe is a senior advanced planning attorney with Northwestern Mutual.

Homes are important parts of our history, and inheriting one can send you down memory lane. The gift of a home brings a mix of emotions and practical decisions, and if you’re sharing the inheritance, you may not agree on the next steps.

Whether you might inherit a home in the future or are currently on the receiving end of an inheritance, there are practical considerations as you mourn the loss of a loved one. Below, you’ll see a quick checklist of steps. You’ll also get answers about taxes and mortgages and some analysis of your options.

The first things to do when you inherit a house

No matter what you eventually plan to do with the property—sell it or keep it—there are some things to do as soon as possible.

• Contact the executor of the deceased’s estate or will: This person will give you more details about the property itself.
• Contact an estate planner, lawyer or financial planner: This professional can explain how probate will work and likely answer many questions you have about taxes and other legal matters related to the property. Your family (or the deceased’s estate) may already have someone in this role, but you might want someone who represents your interests.
• Assess and appraise the property: If you haven’t been there recently, visit the home to get a general idea of its condition and take photos. You may have happy memories—but you might see things differently as the owner versus a visitor. Consider having the home professionally inspected and appraised. This can help you decide whether you want to keep or sell the property and can influence factors like your insurance policies and mortgage level (below).
• Secure the property: Make sure that all of the doors and windows are locked. Consider putting interior and exterior lights on timers so that it looks like someone is still living there, which can deter break-ins. If you live in a different state from the property or otherwise can’t get out to it, consider hiring a property manager or security professional to periodically check in.
• Figure out the utilities: You’ll need to either transfer the utilities over to your own name or otherwise have them shut off to reduce costs. (For example, you might not need WiFi, but you probably want to keep the electricity on.) If there are any past-due balances, the deceased’s estate will usually be able to take care of it. Have any mail forwarded to your current address, and make sure that any housing bills or property taxes are paid on time.
• Review any homeowner’s insurance policies: Notify the insurance company of the homeowner’s death. Insure the home in your own name, whether with the same insurer or a different carrier. It’s important to avoid a lapse in coverage even if it’s unoccupied.
• Review the mortgage: If the house has a mortgage or reverse mortgage, request a copy so you can review the terms. Read more about your options below.

Inheriting a house with a mortgage

If you inherit a house with a mortgage, that bill will still need to be repaid. Here are a few options to consider.

• Take on the mortgage by contacting the lender to have the loan transferred into your name. You’d simply take over the existing payments according to the current terms of the loan.
• Refinance the mortgage, especially if doing so would result in a lower interest rate, monthly payments or other terms. In this scenario, the new mortgage would pay off the old one.
• Pay off the mortgage in a lump sum. This could involve buying out siblings if you’re sharing the inheritance.
• Sell the home and use the proceeds of that sale to pay off the loan. You’d keep any profit.

Whichever route you take, it’s important to stay on top of the mortgage payments to avoid potential late fees, penalties and damage to your credit score. It’s also a good idea to document your decisions.

What if the mortgage is underwater?

If the mortgage is higher than the current value of the house, it’s considered underwater. This can complicate issues and may influence what you ultimately decide to do with the property.

If you want to keep the home, you can still take on the mortgage. If more favorable terms are available with a different lender, you can refinance the mortgage. When market conditions change or you make improvements to the home that cause its value to rise, you could sell it for a profit.

If you don’t want to keep the home, you have a few options. As you consider them, keep in mind that your decision can impact your credit score. You can:

• Disclaim the inheritance and pass it to other heirs.
• Allow the lender to take ownership through foreclosure. This shouldn’t affect your credit score. If the sale doesn’t cover the cost of the mortgage, the balance will come out of the rest of the deceased’s estate.
• Request a short sale, allowing you to sell the home at its reduced value. The proceeds are used to pay back the loan. If the proceeds don’t cover the full balance, and the estate cannot cover the balance, the difference can sometimes be forgiven by the lender. But this route may have significant negative effects on your credit score.
• Provide the deed in lieu of a foreclosure, transferring the deed to the lender. This allows them to sell the home. But this can hurt your credit score.

What if I inherit a house with a reverse mortgage?

A reverse mortgage is a type of loan that allows homeowners in retirement to turn the equity they’ve built in their homes into a source of income. It’s effectively a loan available to homeowners age 62 or older. The borrower gets income while remaining in their home. Repayment is deferred until the homeowner sells the house, moves out or passes away.

When you inherit a house with a reverse mortgage, you typically have six months to decide how to proceed. You can:

• Repay the full loan balance using either estate funds or personal funds,
• Sell the home to repay the loan balance and then keep any remaining profits,
• Take out your own mortgage to repay the loan, or
• Turn the home over to the lender.

Consulting with your financial advisor and someone who knows the local real estate market can help you make an informed decision within this time frame.

Tax implications of inheriting a house

If you inherit a house or other real estate and then sell it for a profit, you’ll owe long-term capital gains taxes on that profit just like you would when selling any other asset for a profit. Good news: The cost basis for the house “steps up.” In other words, for the purposes of calculating capital gains taxes, the home’s original value is adjusted to match its current market value—and not the price.

Here’s an example. Your parents purchased a home in the 1980s for $80,000. This is the home’s cost basis. Today, that same home is worth $350,000. If they were to sell the property today, they would owe long-term capital gains taxes on their $270,000 profit. For most people, this would be 15 percent of the profit, or a hefty $40,500.

Now let’s say that you inherit the home when your parents pass away. Because your cost basis is stepped up, your cost basis becomes the home’s current value: $350,000. That means you could sell the house immediately for that amount without owing any capital gains taxes—technically, you wouldn’t have any profit in the eyes of the IRS. If you sold it a few years later (for example, at $375,000), you would owe capital gains taxes only on a much smaller gain of $25,000. Using the same 15 percent tax rate, your tax bill would be reduced to just $3,750.

(For the sake of simplicity, our example didn’t include a variety of deductions that could also help lower your tax bill. Consider speaking with a tax professional.)

Pros and cons of keeping or selling an inherited house

Consider the following pros and cons for each scenario before you make a final decision.

Keeping the home

Pros:

• Family history: Keeping the home gives you the opportunity to preserve family history, especially if you have cherished memories there.
• Wealth-building potential: Real estate can be a valuable asset with the potential to significantly appreciate in value over time, which can help you build your net worth.
• Rental potential: If you don’t want to use the home as your primary residence, you could rent it out to tenants or with a short-term rental company for passive income.

Cons:

• Added expenses: If you keep the home, you’ll be responsible for things like utilities, insurance, maintenance, property taxes and any mortgage payments.
• Financial risk: Just because real estate can appreciate in value doesn’t mean it will; if the property’s value falls over time, you could lose out.
• Concentration of net worth: If most of your net worth is tied up in a house, it means your money isn’t spread across different categories called asset classes. Having most of your value in real estate makes you particularly vulnerable to a market downturn.

Selling the home

Pros:

• Ease: Selling can be more straightforward in the long run compared with maintaining a home. If other heirs are involved, it could be easier to split the profits.
• Fewer expenses: You’ll be free of the expenses of homeownership.
• Liquidity: In most cases, selling results in an immediate windfall of cash. You can put that toward other goals such as paying down debt, saving for retirement, saving for your child’s education or even starting a business.
• Diversification: You could invest the cash into a varied mix of assets known as a “diversified portfolio” so that your net worth isn’t overly concentrated.

Cons:

• Potential family disputes: Selling a cherished family asset can raise emotions for surviving family members and potentially strain relationships.
• Capital gains taxes: If you sell the home for a profit in the future, you may owe capital gains taxes on that profit.
• Loss of income potential: If kept and rented out, the home could become an income-generating asset.

Gain confidence for your next step

When you inherit a house, you’re suddenly faced with a lot of decisions. The next step isn’t always straightforward, and what makes sense for someone else may not be right for you. It’s a great time to talk with your Northwestern Mutual financial advisor, who can help you evaluate your options. They can even point out opportunities and blind spots that might otherwise get overlooked. Together, you can choose the option that fits with your broader financial plan.