- The Washington Times - Friday, October 19, 2001

Most people become homeowners the old-fashioned way they buy it. But many homeowners received their houses through inheritance, and that brings with it some issues that purchasers don't have to face.

First, my advice to anyone who inherits a house is to seek legal and tax guidance from professionals. Don't do this at home you might lose an eye, or something like that. What I've determined from the tax code about inherited property is that you can't determine much on your own.

There are so many issues to be dealt with in the transferring of property when all the parties are alive, it gets very complicated when you're dealing with the transfer of a house from one person to many people, etc.

Heirs of a house have several choices on what to do with the property. They can move into it, rent it or sell it. The choices seem simple enough. Choosing which route to tread is easiest with only one heir, however. If there are several heirs, they must first come up with some ground rules to keep from creating animosity and frustration among the new co-owners/investors.

The ground rules may differ depending on the final decision of what to do with the house. If it's to be sold, questions need to be answered, such as: Who will take care of getting the house ready for sale? Who will handle negotiations with contractors? How will the expenses of preparing the house for sale be divided? Who will take care of the house while it's on the market or being rented out? Who handles the hiring of the real estate agent?

If the house is to be rented out, then other questions arise: Who will collect the rent? Who takes the maintenance calls from tenants? Where will the rental deposits and payments be held? If there is no mortgage, how will the income be split among the heirs each month, quarterly or annually?

Sometimes, the heirs may decide to sell it to one of their own. Family members may want to "help" one of the heirs and pressure others into going along with reducing the house from its fair market value to a price the poorest heir can afford or give them the property outright. These type of decisions can build animosity and strain otherwise good family relationships.

If you're asking for my advice, and I know you didn't, I would say sell the house outright and split the expenses, taxes and profits equally among the heirs. This way, each heir walks away with a profit and does what he wants to with it.

Regardless of which way you go, there are some decisions on the matter that are settled and that's in the area of taxes. The Internal Revenue Service (www.irs.ustreas.gov) does have some useful information about inherited property as the heirs move forward to sell or rent it out.

First, property received as an inheritance is not considered income (even if you receive the property as a gift). So a house worth $170,000 does not go down on your income tax form as an additional income. If the heirs decide to make the inherited home a rental property, however, the income generated by that dwelling is taxable.

If the heirs decide to sell the property, the gain is taxable, as well. If the decedent were going to sell the house, the basis of the property would have been calculated according to the cost of acquiring the property in the year they bought the house many years ago. Now, the heirs the new owners of the house get to adjust that basis based on the fair market value of the property the day the original owner died.

Here's a simple example: If 30 years ago, grandfather bought the house for $45,000, owned it outright now, and then sold the house today for $175,000, his gain would have been $130,000 ($175,000 minus $45,000 = $130,000). The heirs, however, get to now count the current fair market value the day grandfather died. If the fair market value was $175,000 the day he died and the house sells for $175,000 then there is no gain.

(Nevertheless, a grandfather who sold it himself would get to take his exclusion of $250,000 at the time of the sale the heirs would not, since they had not lived in the house as a personal residence two of the last five years. So neither of the parties at least in this example would owe capital-gains taxes.)

I haven't even gotten into what to do if one of the heirs moves in to the property and the others buy out their shares, or how to place the property into service as a rental and eventually sell it using the 1031 Exchange option to purchase another rental property, such as a beach house, ski lodge, or …

As you can see, there are lots of options open to owners of an inherited property, but each comes with its own set of challenges. Get advice. Get plenty of professional advice.

M. Anthony Carr has written about real estate for 13 years. Send comments and questions by e-mail ([email protected]).


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