Inheriting a Home Is More Expensive Than People Think
Most homeowners plan to leave these homes to their heirs , which sounds good: While losing a close relative is painful, inheriting a home means you can get on the homeownership ladder at little cost, at least in theory. For example, when our mother died, my brother and I inherited our childhood home. Since my brother did not have a house at that time, we agreed that he would take over the property, where he has been living happily for many years.
But inheriting a home isn’t just a free house: There are potentially many costs associated with the property, depending on a variety of factors. You need to do your due diligence to ensure that inheriting this property does not become more of a financial millstone around your neck than a benefit.
Mortgage
The most obvious thing to check is whether the home still has a mortgage. Even though the person who took out the mortgage is no longer with us, the mortgage will still have to be paid one way or another, and if you inherit the property, you also inherit the mortgage. So the first thing to check is whether the person who left you the house has taken out additional mortgages or lines of credit using the house as collateral – just because the house was once paid off in full doesn’t mean financial necessity didn’t motivate them to this. former owners are taking out new loans on the spot, and you need to know what you’re on the hook for.
This gets more complicated when it comes to a reverse mortgage —you typically have a fairly tight deadline to either pay off the loan or sell the house (and some restrictions on how low an offer you can accept on the spot). My brother had to pay off a small amount of the reverse mortgage our mother took out on the house shortly before she died.
So, your first task is to check for any outstanding mortgages and contact participating lenders to agree arrangements – and figure out the monthly bill you’ve just inherited. You can usually negotiate some leeway with lenders, especially if you’re planning to sell the place, so it’s worth having a conversation to avoid paying unnecessary interest.
Taxes and liens
The next thing you need to think about when inheriting a home is the tax burden. Even if the mortgage is not paid off, you will not be able to live in the house for free. If you plan to keep your home, you should immediately find out:
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Estate Taxes: Both the IRS and your state will tax the fair market value of the estate, including the value of the home, if it exceeds a certain threshold. The state of Maryland will also hit you with an estate tax.
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Property taxes. You will also be responsible for paying property taxes, which vary greatly from state to state . They are usually based on your local government’s assessments of property values and are collected quarterly.
Once you know how much of a tax burden you’re incurring, you can check to see if there are any liens on the property . A lien is placed on a property when there are claims for unpaid debts – for example, if you hire a contractor to do work on your home and they claim you owe them money, they can place what’s called a “mechanics lien” on the property. You can try public websites that look up property records (like Property Shark ) to see if there are any liens on the house you’ll inherit, but your best bet is to pay some money to a title search company to make sure there are no hidden rights. debts are hidden there.
Permissions
Next, dig into the home’s permit history , especially if renovations have been done. You want to make sure that all of this work was properly authorized and that the revoked permits were closed after proper review. Any open permits will need to be reviewed and closed if necessary, and if you discover that work was done without a permit, you will need to either obtain a retroactive permit from your local building office or confirm that one was not required in the first place. Otherwise, not getting a permit could cost you dearly in a number of ways, from future insurance denials to fines levied by local authorities.
Maintenance and utilities
Even if the home you inherited has a clean permit history, no liens, and you’re not afraid of tax consequences, you need to think about maintaining the home. This can be quite expensive, averaging around $20,000 per year . And if your new home is old and has been neglected for years, that cost could be significantly higher . For example, if the roof is very old, you may need to shell out anywhere from $6,700 to $80,000 depending on the size and complexity of the roof. And that’s just the roof .
In addition to preventing the house from collapsing around you, you also need to consider the cost of utilities: if it’s a large, old, drafty house, it will be difficult to heat in the winter and cool in the summer. — and your utility bills will reflect it. When you transfer utilities into your name, you can look at your bill history to get an idea of how much it will cost you to maintain heat, electricity and water, but make sure the meters have been checked recently. If the utility has been using estimated costs for many years, you may be in for an incredible adjustment.
Miscellaneous expenses
So you’ve got a good handle on your tax bill, you’ve inspected the house and found it’s in decent shape, you’ve calculated the upkeep and utilities, and you don’t have any liens or open permits. A few more costs should be added to the total:
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Grade. To calculate your property taxes, you’ll likely need to get a home appraisal, which typically costs $500 . This may come from the estate itself (not your pocket), but be sure before you assume anything.
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Cleaning up. If the house is still full of stuff, you’ll have to clear it out, which can cost extra if you can’t handle it all yourself.