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Retired Military Finances 301: I'm Going to Inherit a House. Now What? Thumbnail

Retired Military Finances 301: I'm Going to Inherit a House. Now What?

Taxes Estate Planning Managing Your Finances

Mom and Dad are getting on in years and it looks like they’ll likely age in place. When they do pass away, the family house will be passed on to the next generation (that means you). What in the heck do you do when you inherit it?

Immediate Steps

There are things you should attend to before too much time passes (these are things I think need be done…if you’re getting different advice from a lawyer listen to him or her. In other words, don’t take legal advice from a financial planner)

  • If there is a mortgage on the house, inform the lender. You’ll want to arrange for payments to be made and make sure the house doesn’t go into foreclosure.
  • Get an appraisal on the house. This will be useful if you decide to sell or rent the house. If you don’t want to pay for a full appraisal, at least try to get a Fair Market Value analysis from a realtor. As a last resort you could use a service like Zillow. You need the appraisal to determine the house’s new basis which is based on the Fair Market Value on the date of death.

Things to Consider if You’re Selling the House

You may or may not want or be able to sell the house. If you can sell the house and want to, here are a couple of things to consider.

  • Since an estate or a trust is not a real person, it doesn’t have personal property. The general consensus is that a house owned by the estate or trust is investment property.
  • If the estate or trust sells the house, losses would be considered an investment loss and could be tax deductible.
  • Conversely, if the house is transferred to heirs/beneficiaries and is then sold, the loss would be considered a personal asset, and losses would likely not be tax deductible.
  • If the estate or trust sells the house, there will likely be a requirement to file an estate income tax return.
  • To calculate the gain or loss on the sale you’ll start with the sales price, deduct the costs of the sale (realtor commissions, title fees) and then subtract the basis which you determined via the appraisal.

Things to Consider if You’re Going to Rent the House

If the house is in a trust, you could leave it in the trust (depending on the trust instruction) and rent it out. If the house is in the estate or the trust requires distribution the house would likely be distributed first and then made available for rent.

  • Regardless of where the house is held, the rental activity is taxable. If the house is in a trust who pays the tax depends on whether the trust document dictates that all income be distributed or not. If distributed, the beneficiaries pay the tax. If held by the trust, the trust pays the taxes.
  • You’ll still need the appraisal. The appraised value of the structure will be used for depreciating the house. When you have the appraisal done, ask for the appraiser to separate out the land so that you know the value of the structure.
  • It is important to keep track of all expenses and improvements to the house after date of death to determine how much of the rent received is subject to tax.

What If there are Siblings Involved?

Your younger brother may still be as annoying as he was when you were kids but if he is also an heir or beneficiary, you’re going to have to deal with him. Things will be more complicated and here are some thoughts.

  • If the house is to be sold, I think it is better to have one decision maker. That means selling the house prior to distribution from the estate/trust. Your brother might not like the deal made by the executor/trustee but he can’t stop a sale if he doesn’t like the deal (that doesn’t mean he can’t sue the executor/trustee though).
  • If the house is going to be a rental after distribution from the trust or estate, I think it make sense to go through the formalities of forming a partnership (or perhaps an LLC if that won’t accelerate the mortgage). I think it lends to better/more accurate tax reporting. In this case the partnership would file a tax return and the partners would receive Schedules K-1 reporting profits or losses. A partnership agreement may also prevent future disagreements (or at least address how disagreements will be handled).
  • I’ve been told it is o.k. to not form a partnership and split the income and expenses. It makes me a little nervous. What you definitely can’t do is get creative. For example, you can’t have your brother claim all the expenses and you just report ½ the income (so that he can qualify for the Earned Income Credit as an example). You have to accurately report yours and your brother’s income.

Inheriting a house can be a blessing. It can also be a curse. Having a path with a few guideposts along the way can be very helpful.

Military Finances are Different

Civilians inherit houses too. That doesn't mean everything in their financial life is the same as an Active or Retired Senior Military Officer or NCO. That's why we think you should work with a financial advisor or planner that deals with military related benefits and special tax treatment every day. If you'd like to find out how we do things use the button below to schedule a free initial consultation.

If you found this article useful, you might like the following blog posts:

One Reason to Consider Moving Your Assets Out of TSP - Estate Planning

Retired Military Finances 401. Gifting Strategies to Reduce Income Taxes for Married Couples

Military Finances 101: Titling your Home

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