Inheriting a house seems like a windfall, but such a generous gift comes with many obligations. The reality of inheriting property includes taxes, maintenance, security, and management issues.
An experienced estate planning attorney can describe your options for inheriting real estate, whether you keep or sell it. Rather than burdening you with additional work and worry, an attorney can provide a path to peace of mind.
5 Options for Your Inherited Property
There are several ways that real property is passed to an heir. Sometimes the recipient is aware of the inheritance in advance and can make proactive plans for it, but receiving title to a property can also come as a surprise. These are a few of the ways properties are handed down and five options for handling such an inheritance:
- Transfer-on-death (TOD). This is a planned method of assigning the deed to a property to a beneficiary, by assigning ownership to them in advance through legal paperwork filed at the county deed office.
- Probate. Whether an individual dies with or without a will, probate court determines how their assets are distributed according to state law. A will usually directs specific assets to heirs, but without a will (called intestate) state law takes precedence.
- Trusts. Individuals who plan well in advance to set up a trust(s) may or may not inform the trust beneficiaries of their plans to divide and distribute properties.
Financial concerns when inheriting property include;
- Estate Taxes. Illinois has an estate tax on total assets valued at $4 million or more, but that’s paid by the estate owner, not the heir who inherits property.
- Capital Gains Tax. This is a 4.95 percent flat income tax collected on profits made from property sales in Illinois. Federal capital gains taxes may also apply when the property is sold. Capital gains taxes are usually paid on the difference between the step-in value (the fair market price of the property at the time it is inherited) and the selling price, minus the federal exemption.
- Real estate taxes. Illinois has some of the highest real estate taxes in the country at 2 percent of assessed value, which averages to over $5,000 per year. When you inherit property you are responsible for county property taxes.
- Income Tax. If you find renters for the property, you must pay income tax on the rental income.
Ways to handle inheriting real estate include:
- Living in the home. A stable home requires paying property taxes and maintenance expenses. If there is still a mortgage on the property you must contact the lender to assume it. If your income is not sufficient to pay the mortgage you may have to sell it. It’s more complicated when multiple people inherit co-ownership of a property.
- Renting the property. If the property is in good condition and stable renters can be found, you may retain ownership and potentially profit from it. The benefit is offset by maintenance issues and managing renters are added to paying property taxes.
- Selling the property. Liquidating the property simplifies management as well as having multiple owners, but all owners must agree. Without unanimous agreement, you may petition the court for partition, which is a forced sale.
- Buying out other owners. If you and others inherited the property together, you may buy out their shares to simplify ownership issues.
- Refuse the inheritance. If the property that you’re inheriting is derelict and burdensome, it is possible to refuse ownership as long as you do so in writing within a certain timeframe. Discuss the option with an estate attorney before doing so.
Finding Guidance for Inheritance Decisions
Estate planning professionals at Legacy & Life Law Firm LLC can provide a full slate of options for those setting up wills and trusts for inheritances—and for those receiving inheritances. Tax implications, both short- and long-term, are important factors for people on both sides of the equation. Legacy & Life Law attorneys can provide clarity and peace of mind. Contact us for a consultation today.