While many people consider inheriting an investment property an easy way to obtain a fortune, in reality, it comes with a few issues you need to consider. Depending on whether you are a child, spouse, distant relative, or a third party, different inheritance rules apply, so you might have to decide whether to hold on to or sell the property.
Another thing to keep in mind is that property inheritance is often subject to certain costs, like property appraisals, estate, property tax, or capital gains taxes. The amounts you need to cover may differ depending on the type of property and its value. Furthermore, you will most probably have to cover maintenance and utility bills.
Still, inheriting an investment property doesn’t have to give you a headache. All you have to do is prepare for potential problems you may encounter, and this article will help you with that. Below, you will find more information about the costs of inheriting an investment property. So if you are interested in learning more about the topic, read on!
Here are few Points to Consider while Inheriting an Investment Property:
1. Property Appraisal
When you inherit an investment property, you need to know its value. Usually, the property is appraised by a certified appraiser, who will determine the proper market value of the property. When it comes to real estate, the term “market value” refers to the price the property would sell on the open market.
The cost of an appraisal depends on different factors. For example, if you are inheriting a commercial property, the appraiser must prepare a special valuation report that includes an opinion of value, market analysis, and comparable sales. On the other hand, if you are inheriting a residential property, you will probably only need to prepare an abbreviated report.
If you find yourself short on cash and unable to pay the appraiser, you can always try to get an inheritance advance. It allows you to get your inheritance funds before the completion of the probate process. If you are interested in exploring this option, this article explains what you need to know about inheritance advance.
2. Estate and Property Taxes
Another cost you should be aware of when inheriting an investment property is the estate tax. The estate tax is calculated based on the property’s fair market value, which is determined by the estate appraiser and the state tax agency. Keep in mind that the tax rate may differ depending on the state you live in.
3. Capital Gains Tax
If the investment property you inherited was previously owned by someone who was not a family member — for instance, an uncle or an aunt — it might be subject to capital gains tax. This tax is imposed on the sale of property, which means you might have to pay it if you decide to sell the inherited house.
The capital gains tax rate is calculated using the difference between the sales price and the home’s original cost and associated expenses.
4. Maintenance and Utility Bills
If the property you inherited is vacant, you might have to cover the cost of maintenance, as well as utility bills. Usually, these costs are estimated by the estate appraiser before the property is transferred to you, so you can know what to expect. If you are inheriting a residential property that has tenants, this problem won’t occur.
If you are not sure who should cover these expenses, you will probably have to pay them yourself. However, if you inherit a property with a tenant, the tenant will most likely continue to pay rent. If the lease agreement is in your name, you will be responsible for paying the property owner’s share of the utilities and taxes.
5. Legal Costs
If you decide to sell the property you inherited, you will have to pay legal costs. These costs depend on the type of inheritance you receive. For example, if you are a distant relative, you will probably have to pay for independent legal counsel. On the other hand, if you are a spouse or a child, you will likely need to hire an attorney.
6. Transfer Tax
Another cost that might apply when you inherit an investment property is a transfer tax. This tax is imposed on the transfer of the title to the property, and it is charged by the state or municipality where the property is located. The tax rate differs depending on each state’s law, so it is essential to check with your local government agency for more information.
If you are inheriting an investment property, it is crucial to be aware of potential costs. If you want to sell the property in the future, you will most probably have to pay capital gains tax. On the other hand, if you decide to keep the property, you will cover maintenance and utility bills. Furthermore, if you are inheriting a property someone else owned before, you might have to pay a transfer tax.
This is only a short list of costs you might encounter when you inherit an investment property, but it should give you a good idea of what to expect. To learn more about the costs of inheriting an investment property, contact your local government agency.