Options to consider when house is part of an estate
If your parents pass while still owning their residence, there are without doubt, choices to be made. These include but are not limited to whether to put the house up for sale on the market or to make arrangements for a family member to purchase from the estate. Other possibilities include rental for a period of time with the funds going to the estate, lease/purchase, or other dispositions as stated in the will.
Where the will does not specify how the house is to be handled, the executor typically has discretion provided that the proportionate overall distribution is consistent with the will. However, if the terms of the will provided for a “right of first refusal” for one or more family members that person or persons must first be consulted and given the opportunity to buy from the estate. All of this depends, of course, on individual circumstances.
Many factors come into play. Choices by beneficiaries can be affected by whether you are an only child or one of several, whether you are an only beneficiary or whether you need to buy someone else out. Your feelings toward the house and your own finances also play a role in deciding. Here are some considerations.
TAXES » There is good news and not so good news on taxes when it comes to making decisions regarding the house. Property that was titled in the name of the decedent at the time of death and then inherited receives what is called a “step up” in basis at death. This means there is no federal tax on the appreciation in value of the property from the time the prior person purchased the property until the date of death. For instance, if your parent purchased the property for $100,000 and it is now worth $500,000, the federal government does not tax the difference between the $100,000 and the $500,000 on resale of the property. This is true whether the estate sells the property or you receive the property for the estate and resell later. If you obtain an appraisal shortly after death and then move in or if you already live there and the house is transferred into your name you can begin the “clock” for another tax break which is an additional $250,000 exclusion from capital gains on resale after you have lived there for another two years. If you have a good elder law/estates attorney she or he can help with the details and even arrange for the transfer. again with the agreement of the other beneficiaries.
On the other hand, Pennsylvania taxes are relevant to inherited Pennsylvania (but not out-of-state) property. It is due from the estate. The amount of inheritance tax depends on the relationship of the recipient to the owner. The rate for children is 4.5%, for spouses 0%, for siblings 12% and for others 15%.
MORTGAGE » Another consideration is whether there is already a mortgage on the house. If there is, in order to transfer title you might need to satisfy the lender. One consideration is your own finances. Do you have enough to be able to meet monthly payments and is your credit rating good enough to obtain a mortgage in your own name? A good estates attorney should be able to walk you through the options.
REPAIRS » If the house needs repairs and you are considering moving in, this is an important consideration. An advance home inspection could help you decide whether to make the investment.
PROPERTY MAINTENANCE » For a reasonable period of time the estate could carry costs associated with the property and, where you decide to sell, it can make sense to have the estate pay for some repairs, upgrades and maintenance in order to be able to obtain a good price at settlement. If there are other beneficiaries open discussion can be helpful to arrive at a consensus regarding how much is reasonable to spend and the return on investment.
OTHER OWNERS/BENEFICIARIES » If the will says “equally to my three children” or such similar language and you want to buy out the other two, then you need agreement on value/appraisal as well as timing and other details. All of this should be memorialized in a Family Settlement Agreement. A good estates/elder law attorney can prepare it for you and show you how. The Family Settlement Agreement includes an informal accounting whereby all beneficiaries receive their fair share and sign off on the results.
Janet Colliton, Esq. is a Certified Elder Law Attorney and limits her practice to elder law, retirement, special needs, guardianship, estate planning and estate administration with offices at 790 East Market St., Suite 250, West Chester, 610-436-6674, colliton@collitonlaw. com. She is a member of the National Academy of Elder Law Attorneys and, with Jeffrey Jones, CSA, co-founder of Life Transition Services LLC, a service for families with long term care needs.