Many heirs receive real estate because it’s a valuable asset — not necessarily because they need the homes to live in. So, for the heir who doesn’t want to live in the inherited home, what’s the best decision to make? Rent or sell the home?
The answer is clear: It all depends! It’ll turn on the precise blend of the heir’s circumstances and the real estate market.
While we have no blanket best answer for all readers and all markets, we can certainly go over the factors an heir would want to consider.
First Things First
First, it’s up to the heir to accept or decline the bequest.
Before deciding how to handle your inheritance, give the probate court time to settle the debts and issue an executor’s deed (or administrator’s deed if an executor wasn’t named). Assuming those debts can be successfully cleared, the probate court will prepare the deed.
Know what you’ll likely have to spend on the home, once it leaves probate. It’s perfectly healthy to make a financial (not emotional) decision. And it’s fine to turn down an inheritance if it will be more of a burden than an asset.
Plan A: Renting Out the Inherited Property
You might opt to keep the home as a source of income. This could fit your circumstances if you are in the position to fix up and maintain the property as a rental unit. But be sure to carry out due diligence. Understand any applicable rent-control and renter-protection laws.
Brush up on best practices to screen potential renters for your inherited home.
If the home is appealing, in good condition, and well located, it could pull in a steady, sustainable flow of income. Figure out if your rental could pull in a monthly return of 1% of its value or higher (accounting for what you’ll pay a management firm if you hire one to handle the work). Avoid overestimating your potential income and lowballing the costs of maintaining a home for others to live in.
Yes, rental earnings are taxable income. Consult with a financial adviser. Understand the trade-offs. Consider the tax breaks you’ll get for the rental property, too.
In addition, there’s potential appreciation. Homes historically rise in value over the years — but they’re expensive to buy. Inheriting gives you a serious boost.
Your inherited property can be a huge financial advantage even if the home isn’t where you want to live. Ultimately, collecting rent and building up value in the home could help you buy another home — the one you’ve always hoped for.
Plan B: Deciding to Sell the Inherited Property—Sooner or Later
Your personal circumstances might make selling the best decision. For instance, the windfall of an inheritance can be crucial if you’re mired in financial struggles.
Selling could also have special appeal if you are inheriting with others. For multiple heirs, selling and splitting the proceeds could be the simplest way to enjoy and appreciate the value of your inheritance.
How do heirs sell their inherited homes? Check out our guide to selling a home from probate in six steps.
Yes, selling the home means letting go of a potentially healthy income stream. But this is a case of one door closing and another door opening. You could use the funds from the sale to invest in dividend stocks, high-yield savings accounts, or CDs. An account that produces income demands far less time and effort than managing a rental property — especially if you’re not an experienced landlord. Speak with a financial adviser to weigh your own potential benefits and opportunity costs.
And if you do decide to sell, a reputable agent can smooth out the rough edges of the process. Expect the typical home to take a good three months or more to get in shape for the market.
Of course, some heirs seek a property investor willing to purchase the home in its current condition.
Avert a catastrophe. Vet real estate investment companies with care, to avoid opportunists.
In general, selling the property could make sense for heirs who need to pay down debt. It could make sense for heirs who lack the resources to renovate the home as needed, or heirs who live a long distance from the home.
Then again, some heirs may prefer the inherited home to their present home. If so, then selling the present home and moving to the inherited one could make perfect sense.
What About Taxes on My Sale?
A silver lining in probate is the stepped-up cost basis for tax purposes. As the heir, you can sell the property and receive its value without having to pay capital gains tax on all the appreciation in your home ever since its late owner first acquired it.
Instead, as the heir, you’ll be entitled to a “step up” in the cost basis. In all states, an heir such as adult child or the surviving spouse receives this benefit on a home that was deeded in the sole name of the late owner.
What happened to the late homeowner’s mortgage? Learn what goes on, in our discussion of this topic: After You’re Gone, Does Your Mortgage Live On?
The step up of the inherited home’s tax basis to its value on the market at the time of the late owner’s death comes in addition to some well-known exemptions:
- The Section 121 Exclusion: A home you’ve lived in for a total of at least two years out of the past five years leading up to your sale date is your primary residence. The IRS lets primary residence sellers off the hook for tax on gains up to $250K per taxpayer.
- One Year for Asset Appreciation to Count as Long-Term Gain: Hold an inherited property for at least one year, and the appreciation of its value becomes a long-term capital gain, which the IRS taxes more lightly than short-term gains.
States have their own tax rules. And some states make real estate heirs eligible for extra benefits in addition to the standard stepped-up tax basis. Consult your tax adviser for individualized advice.
A Word to the Wise Heir
When deciding what to do with a major inheritance, so much depends on the particular facts and the heir’s own situation in life. So, as you prepare to make optimal use of the bequest, study the possibilities with care. Consult a professional to weigh potential tax impacts and understand implications that may not be obvious, or that could change your situation down the road.
Best wishes with your new asset, and may gratitude comfort you. Inherited real estate is generational wealth, and that’s well worth appreciating in these times.
Supporting References
James Holbach for GOBankingRates, published by Nasdaq, Inc. via Nasdaq.com: You Inherited a House: Should You Sell or Rent It? (Oct. 5, 2023).
Lauren Nowacki for Rocket Mortgage, LLC via RocketMortgage.com: Breaking Down The 1% Rule In Real Estate: What You Should Know Before Investing (Feb. 27, 2024).
Berkshire Hathaway, HomeServices of America, Inc.®, via FoxRoach.com: Finance – Capital Gains Tax on Inherited Property.
Deeds.com: Four Reasons Real Estate Tops Other Investments (Aug. 3, 2022).
Will Kenton for Investopedia: Step-Up in Basis – Definition, How It Works for Inherited Property (updated Feb. 28, 2024).
And as linked.
More on topics: Starting your small rental business, Quitclaiming a home to avoid probate
Photo credits: Christa Grover (both).