What to Do with an Inherited House in Houston – Your Options

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Inheriting a house could be a wonderful gift or a terrible burden. Either way, making the financial decisions that come with inheriting property after losing a loved one can be stressful and confusing.

Have you just inherited a house and now you’re unsure what to do?

You basically have three options: Move into the house, sell it, or rent it out.

This article explains the pros and cons for each of your options by examining the 4 most important criteria to consider after inheriting a house:

Financial burden – How much money will it cost?

Tax implications – What extra taxes must be paid on a one-time and/or ongoing basis?

Divisibleness – Can it be divided between beneficiaries?

Miscellaneous – Are there any other considerations?

Moving into an Inherited House

Inheriting a house can be a huge windfall to someone that is currently renting. Moving into your recently inherited house might seem like a good idea. In fact – if you are the sole owner of the property and it is completely paid off – it could be a great idea. Unfortunately, it gets significantly more complicated if there are multiple stakeholders in the property and/or there is a mortgage (especially if you are not a family member of the deceased).

Financial burden – If you have never owned a home, it might be a surprise to find out just how expensive it can be – even a home that is paid off. At the time of this writing, Texas has the 4th highest property tax rates and the 7th highest homeowner’s insurance rates in the country. Add in maintenance and repair expenses, energy costs, HOA dues, and flood insurance (if necessary) and the cost of owning a home in the Houston area can be enormous, even without a mortgage!

Tax implications – You will be responsible for property taxes every year, but you will be able to escape capital gains taxes when you finally sell the house if you own it for at least two years.

Divisibleness – Moving into an inherited house gets more complicated if there are multiple stakeholders in the property. Assuming they are not going to move into the home with you, your other two options are to buy them out of their share of the property, or pay them rent each month.

Miscellaneous – If there is an existing mortgage on the property, there is probably language in the contract that calls the entire loan due when the title is transferred.  This is called a “due-on-sale clause.”  If the lender chooses not to enforce the contract, you might be able to assume the loan. If they do enforce it, you will have to pay the entire remaining loan amount or sell the property.

Selling an Inherited House

Selling is a very versatile option for an inherited house, which is why most inheritors choose to sell. It might be your best option if any of the following are true:

  • Your inherited house is in another state
  • The house requires extensive repairs to make it move-in ready
  • There are other beneficiaries involved
  • You aren’t prepared for the extra financial burden of owning a house
  • You need fast cash for other purposes

Financial burden – Unlike the other two options – if you sell the house quickly – the financial burden will be temporary and minimal (or even nonexistent).

Tax implications – The IRS gives favorable treatment to the inheritance of a property. You won’t pay capital gains tax on the increase in the value since the last sale, only on the increase in value between the time you inherit the property and when you sell it.

For example: if the home was bought 30 years ago for $50K, was worth $200K when you inherited it, and you sold it for $205K, you will only pay capital gains taxes on $5K – the difference in value between the sales price and the fair market value when you inherited the property.

Divisibleness – If there are multiple beneficiaries involved in an inherited house, selling is the simplest way to divide the interest in the house between the stakeholders. It’s as simple as selling the house and dividing the profits.

Miscellaneous – If you decide to sell your inherited house, it will be most beneficial to sell it quickly; holding costs can add up quickly. “Not selling a house and not living in it makes for increased maintenance and insurance costs without much to show for them, and that financial stress adds to the emotional stresses involved,” says Rhea Friedman, a certified financial planner.

If you are considering the option of selling your house in the Houston area, consider selling it to Brighter Side Home Buyers. We take the stress out of the home-selling process by buying houses in any condition and we pay all closing costs.

[Related Article: Dump That House! The Ultimate Guide to Sell Your House Fast in Houston]

Renting Out an Inherited House

The extra monthly income you can get by renting out your inherited house might seem tempting. And it’s true – the extra cash flow can be very beneficial. But it’s important that you understand all of the extra responsibility that comes with being a landlord and the true cost of owning a rental property (which most people underestimate).

Financial burden – First, you will need to make the house rental-ready by catching up on any maintenance that has been deferred. Then, you need to properly account for all of the ongoing expenses: mortgage, property taxes, homeowner’s insurance, flood insurance, maintenance, repairs, property management, utilities, and the big one that most first-time landlords forget – vacancy.

Some of these items might not apply to your property, or you might have other expenses that aren’t on the list. Examine your own situation and come up with an all-inclusive list of expenses. It’s important that you have enough cash reserves to pay for all of the expenses if the house remains vacant for several months between renters.

Tax implications – Unlike moving into the house, you won’t be able to escape capital gains taxes by owning the property for two years – that benefit only applies to owner occupants. When you finally sell the house, you will have to pay capital gains taxes on the difference between the sale price and the market value of the home when you inherited it.

Divisibleness – Similar to splitting the profits from selling the house, you can split the monthly cash flow with the other stakeholders.

Miscellaneous – Having multiple stakeholders can compound the stress of renting out a property. Make sure you have a way out of the arrangement if you decide later that land lording isn’t for you.

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