An inheritance of a house or other real estate from your parents can be a sign of their love for you and their desire that you enjoy their legacy. But dealing with this type of inheritance can also be complicated.
It is not the same as buying a home on the open market. For one thing, there is a chance that you will have to pay capital gains taxes on the house or pay off the mortgage. For another, if you have siblings, you likely inherited the house together. That means making a decision that everyone is okay with.
Taxes
If you sell the house, the government treats it like the sale of an investment like a stock. If the value of the home went up since your parents bought it (which it probably has), it could trigger a capital gains tax bill. However, most of the time, when someone sells real estate they inherited, the IRS only taxes them on a step-up basis. This means they are taxed only on the amount of increased property value since the person inherited it. If you sell soon after inheriting, the amount of tax you owe should be minor.
Co-ownership
Co-owning a home with one or more siblings can make things tricky. Many heirs choose to sell or rent out the home and split the proceeds. Other times, one spouse moves into the house and buys out their brother or sister’s share. A buyout can happen in a single cash payment or financing, or through a promissory note and monthly installments.
The big three options
Essentially, your choices are to move into the house, sell it or turn it into a rental property. Each has its pluses and minuses. Getting a new home without having to pay for it is a huge savings. But it means you take responsibility for repairs, utilities, property taxes, any homeowner association fees and so on.
Selling also could mean you will have to pay for expensive repairs, though the proceeds of the sale will hopefully cover those. You will also have to pay for closing costs, realtor fees and pulling title. And you could have to pay stepped-up capital gains tax on the proceeds. Finally, renting the house can create an income stream, but you would still be responsible for upkeep and property taxes without having the use of the property.
With careful consideration, you can find the option that fits your goals and honors your parents.