- The Washington Times - Friday, October 20, 2000

Inheriting a house can be an emotionally confusing experience. You just lost a parent, grandparent or favorite aunt and feel emotionally drained by your loss, yet you suddenly own a house, and you have to deal with that.
How do you proceed in a way that honors your loved one while protecting what they have given you? No one wants to feel greedy at a time like this, but it's reasonable to want to minimize your taxes and maximize your gain. Simply put, you'll need some help on this one.
An accountant get one if you don't have one will be an essential part of your team. Estate taxes tend to be confusing and complicated, which is why there is such broad support for a repeal of the "death tax." For now, however, you'll need to do some math.
"The number that matters most is $675,000," according to Rob Huey, president of the accounting firm Huey & Associates in Bethesda. "Whenever a person dies, an estate is created. If the value of all the assets in that estate is $650,000, you don't need to worry about the estate being taxed. But every dollar over $675,000 is taxable."
If the home you inherit was owned outright by your deceased relative, the current value of the home is added to the estate's total value. If however, a mortgage or equity loan remains to be paid, the balance on the loan is subtracted from the home's value.
For instance, if you inherit a home worth $800,000 but there is an unpaid balance of $300,000 on the mortgage, you really are inheriting only $500,000. Should you decide to sell the property, you'll need to pay the mortgage company $300,000 out of the proceeds. If you keep the home, you'll need to start making mortgage payments.
Obviously, determining the true value of all property in an estate is very important. That's why hiring an appraiser is another of the first steps you should take. Once you know just how much the estate is worth, you will be able to enlist the help of a Realtor and accountant to help you with the decisions you'll need to make.
Should you live in the home, sell it, rent it or just keep it? Each of these options has tax-related, legal, strategic and emotional implications. Because each situation is so personal, it's hard to find general advice that applies to each one.
"You know, in a very real sense, we are highly paid, professional counselors," says Mark McFadden, an agent with Pardoe Real Estate. "Buying and selling homes are some of the most stressful things anyone ever goes through. Add in the death of a loved one, and you can have a huge struggle ahead of you. That's why you'll need a tremendous amount of help."
Even if the house is next door, there's a lot to handle. But what if it is in Des Moines? What if it's in poor condition? Or suppose Uncle Mike wants to buy it from you. Maybe you should move into the property yourself and avoid all of this. Often, though, that's not an option, so many folks find they need to sell the home or rent it out.
The Washington market is very hot, so selling is a viable option, but Des Moines might be going through a slow period, making it unwise to sell a property there.
"You can't just go to another state and wing it," Mr. McFadden says. "It is hard enough to determine the value of your own home, so don't expect that you can evaluate the value of a property in a completely different market. You will need a pro from that neighborhood."
If you can't make a profitable sale at the moment, you may want to rent the home until the market improves.
"Some clients of mine inherited a property in the mid-1990s and felt the condition was very substandard," says Jean Andrews, president of the Anne Arundel County Association of Realtors. "They couldn't really afford to fix it up, so they rented it out and used the rental income to pay for renovations. When the market heated up recently, they were able to sell it at a very good price."
In the Washington area, renting also is a viable option now because the rental market is hot.
"But who will manage it?" Mrs. Andrews asks. "Unless you live nearby, are handy and have free time, you will probably want some help with finding tenants, collecting rent and arranging for repairs."
Fortunately, there's a whole fleet of Realtors who specialize in property management. Their fees might seem large at first often 20 percent of the rent but the assistance they render could be worth it. Consider this: If the property sits vacant for even two months while you try to find renters by word of mouth, your losses approach 20 percent of a year's rent.
If you don't want to rent the property but are attracted to the idea of renting as an investment opportunity, you might want to play banker. "Holding a mortgage yourself when you sell is something most people can't do, because they need the proceeds from the sale to buy their next home or to pay off the bank," Mrs. Andrews says. "But now you own this inherited house outright. You can sell it to someone yourself and receive their monthly mortgage payments for the next 30 years."
There certainly are some risks in becoming a mortgage holder, but your accountant can help you sort things out.
Whatever you decide, you might have to share your plans with others. "If the home has been handed down to other beneficiaries besides yourself, but you are handling things, you are obligated to inform them of everything that's going on," Mr. Huey says.
If renting or playing banker seems like too much of a hassle, selling the house could be the simplest option. If you choose to sell, you'll have to learn some things about the property first. If you haven't been there much in recent years, you won't be familiar with any structural flaws that could impede the sale.
"When my client doesn't know the home very well, I always recommend a home inspection before we put it on the market," Mr. McFadden says. "If you find significant problems, you'll want to price it accordingly. There may be $30,000 of repairs needed to really get the home in top condition, but I'd advise you to lower the price rather than fix it up. It's going to be much easier on your family if you sell it as is, rather than trying to scrape up enough money from everyone to do work that may or may not improve the value of the home."
Determining the true value of a home can be tough. Home prices have shot up in some neighborhoods by 10 percent this year. Don't rely on the appraisal of the estate you have done for tax purposes as a guide to pricing the home for sale.
"In this market, a home may appraise for $450,000, but sell for $500,000," Mr. McFadden says. "That's where having a good agent comes in. Appraisers are very good at what they do, but they can't know the neighborhoods and current inventory as intimately as we do."
The true value of property is whatever it will sell for on the open market, no matter what the official-looking appraisal documents say. That's why you also should be careful if a friend or neighbor of your deceased relative offers to buy the property.
"It may seem easier just to sell it to Mr. Clark next door or to your cousin Sue," Mr. McFadden says, "but you should still use an agent and put it on the open market. That's the only way to see what market value for the home truly is and to keep everything professional and above board."
By the way, if you happen to be getting on in years yourself, you may want to take this opportunity to do some estate planning of your own. There are ways to help your inheritors avoid the death tax if your estate is going to be worth more than $675,000.
"A pretty standard tool we use is the Qualified Personal Residence Trust," Mr. Huey says. "This is a way for you to give your house to your children incrementally while you are still around."
Under federal tax rules, anyone can give anyone else a gift of $10,000 or less each year without its being taxed.
Using this established accounting procedure, you can transfer ownership of your home to your heirs in $10,000 increments each year. Over time, this can bring the value of your estate under the current "death tax" benchmark of $675,000. The estate exclusion amount is scheduled to increase to $1 million by 2006, but federal lawmakers also are considering repealing the tax altogether.
Your accountant can give you the details on establishing a Qualified Personal Residence Trust.

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