How do you remortgage your house

Advice for selling it, moving in or renting it out

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Boomers stand to inherit upwards of $27 trillion over the next four decades, according to The Center of Wealth and Philanthropy at Boston College, and a portion of that includes the house their parents lived in.

 

But when that house becomes yours, figuring out what to do with it can present financial and emotional issues. If your siblings are involved, things can get even trickier.

 

“There are three basic paths you can take,” says Bruno Graziano, a senior estate planning analyst with Wolters Kluwer, CCH. “Sell the house, move into it, or rent it out.”

 

 

Here’s advice for each scenario:

 

Selling Your Parent’s House

 

A few years back, when Ken Levy, 65, and his brother inherited their mom’s condominium in Dallas, Texas, they pretty much knew they’d sell it.

 

Since the condo had appreciated in value during the nearly 10 years their mom owned it, the Levy brothers looked at recent comparable sales to price it right and to agree on a minimum amount they’d accept.

In spite of the appreciation, the Levys knew they’d most likely avoid owing capital gains taxes on the sale. “Beneficiaries receive a stepped-up basis, which is the property’s fair market value at the date of the parent’s death,” says Graziano. “When you sell, you only pay taxes on gains over that basis.”

 

Currently, long-term capital gains run upwards of 20 percent, depending on your tax bracket.

 

 

Looking at comps and deciding on a minimum price, as the Levys did, are good ideas if you plan to sell your parent’s home. You’ll also want to make sure the homeowner’s insurance is paid up and the estate or trust is named as the insured, in case anything happens to the home between your parent’s death and the sale. The same is true of mortgage payments (if any), property taxes and utility bills.

 

Once the property sells, you’ll need to pay any remaining mortgage balance along with any real estate commissions, transfer taxes and other closing costs.

 

Moving Into Your Parent’s House

 

It was no surprise when Linda Ferrando, 54, and her husband moved into the family home in Burlingame, Calif. after she and her two sisters inherited it. “My sisters and I had talked about it with my mom before she passed,” says Ferrando. “We all agreed it made sense. It was just around the corner from me and much larger than my current house — and my sisters lived elsewhere.”

 

Says Kathleen Grace, managing director at United Capital: “We call that [advance planning] creating a family legacy book. This book provides clear instruction on how assets like a house will eventually be administered while the parents are alive, thus avoiding sibling confrontation when it’s time to settle the estate.”

 

 

Moving in also gave Ferrando and her sisters a year to sort through her parents’ belongings, a luxury

not available to those who sell immediately. During that time, Ferrando and her husband paid her sisters rent and eventually bought them out.

 

Keep in mind, moving in may mean an increase in property taxes for you. Not only will the house be worth more than before, because of the stepped-up value, but any special property tax break for senior citizens may disappear. You’ll have to qualify on your own for such treatment.

 

Still, there’s an added advantage down the road if you later sell and the house has appreciated in value by then.

 

“If the inherited property becomes your principal residence, you can eventually qualify for the capital gains exclusion,” says Graziano.

 

That means if you sell, you can pocket the profit (up to $250,000 for single filers, $500,000 if you’re married and filing jointly) without owing capital gains taxes. Graziano points out that you must live in the house for at least two of the last five years prior to the sale date, however.

 

Renting Out Your Parent’s House

 

When Jan Ferry-Waxman, 52, and her three siblings inherited the family home in Sodus Point, N.Y. they weren’t keen on selling it. For the past 30 years, the house had been the gathering place for family get-togethers.

 

The Ferry children’s solution? Make the house a vacation rental to generate income, but still use it for family celebrations on a limited basis.

 

To keep costs down, Ferry-Waxman, who lives 45 minutes away from the house, serves as its property manager. Of course, this money-saving strategy only works if you live reasonably close to the property. If not, you’ll need to hire a property management firm. which can cost between 10 to 30 percent of the rent.

 

You’ll also need to change the insurance coverage to a landlord policy which covers the structure and personal property as well as medical and legal liability — in case a tenant gets hurt or sues you, and loss of rent, if the property becomes uninhabitable due to a covered loss.

 

Turning the home into a rental provides a big tax benefit, too. “The depreciation expense will serve to reduce your taxable rental income,” says Graziano.

 

For tax purposes, the house (not the land) is considered a depreciable asset and a certain percentage of its value can be deducted annually. You can also depreciate improvements, like a new roof, provided they add value or will extend the property’s life.

 

The catch is you’ll have to pay back that depreciation to the Internal Revenue Service if you sell. That means you’ll owe more in capital gains, if there are any, and that you also won’t qualify for the capital gains exclusion since the house isn’t your principal residence.

 

But you and your renters will have good times in your parent’s former home, and that’s priceless.

Craig Venezia is a real estate writer for the San Francisco Chronicle and author of Buying a Second Home: Income, Getaway or Retirement .

Source: www.nextavenue.org

Category: Credit

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