Are you inheriting a home? There are several options to consider if you’ll be the beneficiary of this sort of bequest and don’t want to keep it.
Inheriting a Home: To Keep or Sell
Q: I read your column regularly and always find it very interesting and informative.
I have a rather complicated question: My brother and I inherited my father’s vacation home when he passed away. It was part of his trust. All of the assets of the trust have been distributed except this house. I want to sell it, and my brother wants to buy me out. Unfortunately, he has neither the money to buy it outright, nor good enough credit for a loan.
He proposes to give me a down-payment and then pay me monthly for the balance. There is no existing mortgage on the house. I’m willing to do this, but even though he is trustworthy and I don’t believe that he will default on the loan, I want to make sure that I protect my interests. I also want to comply with IRS requirements and can properly close the trust.
What is the best way to go about this? Are there IRS rules for how much (or how little) interest I could charge him? What types of legal forms should I fill out to protect myself? Would we be able to close the trust if he still owes me money? Would we re-title the house in both our names until the loan is paid off? And how would I treat the down-payment and monthly payment on my taxes? I appreciate any advice you could give me.
Options when Inheriting a Home
A: Thanks for your question. When reading your question we wondered why the issue of inheriting the home was not addressed before the other assets in the trust were distributed. If the trust had sufficient funds, you and your brother could have agreed to split the assets in the trust and included the home at that time. You could have ended up with more or all of the cash or investment assets from the trust and your brother could have ended up with the home.
You didn’t go that route and it appears that the only asset left to divide between the two of you is the home. At the present time, the trust owns the home. In other words, the title holder to the home is the trust.
To close out the trust, you’d need to deed the home out of the trust and could deed it to your brother or to you and your brother jointly. Once the home is out of the trust, the trust would no longer have any assets. And, this leads us to the essence of your question as to how to handle the home and its future ownership.
Taxes on the Inherited Home
You have quite a number of options on how both of you could own the home. You inherited the vacation home. If you sell the home within a year of the death of your father, you wouldn’t have any federal income taxes to pay on the profits of the sale. Since you inherited the home at the value at or around the time of your dad’s death, if you sell the home within a year, the value at the time of sale is considered by the IRS to be the inherited amount.
On the other hand, if you or your brother want to keep the home and then sell it down the line, you’d have taxes to pay on the profit on the difference between the home’s value when your dad died and the value of the home when you sell it.
An Estate or Real Estate Attorney Can Help if You’re Inheriting a Home
You want to sell and your brother wants to buy, but can’t really afford it. So, here are some options. First, you could sell it to him on an installment basis and convey your ownership to him once he fully pays you what he owes. Or, you could sell him your half and take back a mortgage for the amount your brother owes you.
In either case, you’d want a real estate attorney to help draw up the paperwork to protect your interests. You might also want to discuss the tax implications of either situation with the attorney or your tax advisor. Usually, when you sell the home outright, you’d pay taxes on any profit at the time of the sale. Since you have no profit on the sale, you’d have no taxes to pay.
Understanding Taxes when Selling on Installment Basis
On the other hand, when you sell something on an installment basis, you pay taxes on that money as you receive it. You’d want to confirm with your tax advisor that the sale on an installment basis would also not result in any tax liability to you each year that you receive payments from your brother.
The Internal Revenue Service does require a certain minimum amount of interest to be charged to avoid certain tax issues. If the interest is too low, the IRS might treat the difference between the interest rate charged and the market rate as a gift to the person paying the interest. While that may not affect some people, it can cause some paperwork and filing issues.
The IRS publishes these minimum rates as “Applicable Federal Rates” and you can find them on the IRS website. (https://www.irs.gov/applicable-federal-rates). The IRS gives you guidance on short term, mid-term and long-term rates and you can use these rates as a guide in deciding what interest rate to charge your brother or you can simply use a market interest rate that is above these rates.
Finally, your brother can refinance you out of the money he owes you down the line and would then own the home free and clear of any interest you might have.
Good luck and let us know how it goes.
Read More about Inheriting a Home:
What Happens To Your Taxes When You Sell An Inherited Home?
Inheriting Property in a Trust
How to Take Out a Loan on an Inherited Home
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