If you’ve suddenly inherited a house, you may not be prepared for the questions and issues that can arise. And if you make the wrong decisions, you will likely encounter financial, emotional, and family problems before long.
Forewarned is forearmed, they say, so here’s some of what can go wrong when you inherit a house in Phoenix, AZ.
What Can Go Wrong When You Inherit a House in Phoenix, AZ
You May Owe More Taxes than Anticipated
Most people don’t have to worry about estate tax because of the very high exemption (in the millions), and the estate tax was even temporarily suspended on 2010. But also mostly suspended in 2010 was the step-up provision. So in considering what can go wrong when you inherit a house in Phoenix, AZ and when you intend to sell it, you need to consider the stepped-up capital gains situation.
The step-up provides that you pay capital gains taxes only on the gains above the fair market value at the date of the decedent’s death. This may surprise you to learn but It has nothing to with the price the decedent paid for the house – unless the step-up falls in one of the years when it was changed. In that case, you may owe a lot more in taxes than you bargained for.
The House May Need Repairs and Upgrades
With respect to what can go wrong when you inherit a house in AZ, this one may be the most costly. Most of the time, people inherit a house from a deceased elderly parent or very close relative. If the family member owned the house for a long time it’s common that the house has become “dated” and just not appealing to the average home buyer. Also, besides not being motivated or not having the physical ability to do regular maintenance and needed upgrades, many elderly people simply don’t have the money for it. And if they do, they may just choose not to because they know they won’t be living in the house for very many more years.
If you plan to live in the inherited house, much of this may not be a huge concern. But if you intend to rent it or sell it, you’ll have to make repairs to make it presentable. If the house is stuck in the Brady Bunch era, you will need to update the color scheme. Plus any upgrades to bring it up to code and meet other legal and insurance requirements. Consider that installing a new HVAC system or re-wiring the house will involve a large out of pocket expense.
The Mortgage May Be Bigger than You Thought
Generally in the past, when an elderly parent or relative passed, the mortgage on their house was paid off. These days, though, it’s common for elderly people to take out a reverse mortgage on their home to supplement insufficient retirement funds.
You need to be aware, then, that a reverse mortgage cannot be assumed by heirs. There’s also an occupancy requirement that comes with the reverse mortgage. So once the family member has passed the lender has the option to call the loan due. And in the case of a standard mortgage, you can assume the mortgage only if you live in the house yourself. So if you intend to rent the house, you may have to refinance it in your own name.
You May Have Problems with Relatives and Joint Heirs
But what if you’re not the only heir? That can be a problem. Suppose you and your siblings inherited the house jointly. If you want to sell it, your sister may want to rent it, and your other brother, to live in it himself. Family issues can be super stressful during this time. Just keep in mind what a potential head ache this could be if this the other heirs have different opinions on what to do with the property.
In most states, joint heirs of a home are considered tenants in common, and one heir can force a sale if it comes to that. The process, however, is expensive. The emotional scars and familial consequences are likely to be highly unpleasant.
So what can go wrong when you inherit a house in Phoenix, AZ? Quite a lot, actually, if you’re not up to speed on tax laws, mortgages, and upgrade issues. It is best to contact a qualified professional to help head off these issue quickly.