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Inheriting a home can be a blessing and a burden Along with the house often comes an unpaid mortgage that the heir is now responsible for. While repaying the loan and keeping up with taxes on the property can be challenging, heirs do have options to make the situation more manageable This article will explore how to handle repayment when inheriting a home with a mortgage, along with key tax deductions to be aware of.
Taking on Responsibility for the Loan
When someone passes away their debts don’t disappear. This includes the mortgage on a house that is left to heirs. As the new owner you become responsible for making the monthly payments and paying off the remaining loan balance.
First, review the mortgage documents to understand the amount left to be paid, interest rate, payment due dates, and other key terms. Continue making at least the minimum payments each month to avoid late fees or defaulting on the loan.
If you want to keep the house, you have the option of taking over or “assuming” the mortgage in your name. This involves a formal process with the lender to transfer responsibility. The good news is that a 1982 federal law called the Garn-St. Germain Depository Institutions Act provides protections that enable heirs to assume existing mortgages on inherited property under certain conditions.
If there are other beneficiaries who inherited part ownership in the home, you may need to buy out their share to take full ownership. This involves getting an appraisal, agreeing on a fair price, and securing financing to pay the other heirs.
Weighing the Decision to Sell
While assuming the mortgage is one option, you may choose to simply sell the inherited house instead. This allows you to pay off the mortgage loan immediately with the sale proceeds.
Any remaining profit after paying off the mortgage debt can be distributed to heirs according to the will or estate laws in your state. When selling soon after inheriting the home, capital gains taxes are unlikely because the tax basis gets stepped up to the current market value upon inheritance.
One downside is that you must continue making mortgage payments until the home sells. It may take months to go through the selling process. Ask the lender if you can switch to interest-only payments temporarily to reduce the monthly costs.
Claiming Mortgage and Tax Deductions
Once you take ownership of an inherited home, you can start claiming mortgage interest and property taxes as itemized deductions on your personal tax return.
This helps offset costs just like with any investment property or second home you own. However, there are some limits if the inherited home is not your primary residence:
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You can deduct mortgage interest on up to $750,000 in total mortgage debt across all your properties.
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Property tax deductions are limited to $10,000 per year across all properties.
-Rental income from the inherited property must be reported, but you can deduct related expenses like repairs and maintenance.
-If you sell the home later for a profit, capital gains taxes will apply based on the home’s stepped-up cost basis from when you inherited it.
Other Tax Considerations
A few other taxes may come into play when inheriting property:
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Federal estate taxes apply only if the deceased’s total estate exceeds $12 million. Less than 0.2% of estates owed federal estate tax in 2019.
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Several states levy separate estate taxes or inheritance taxes. These are paid by the estate or heirs respectively, not the deceased person’s assets.
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If you inherit a home with a reverse mortgage, you only have 6-12 months to repay the loan balance before the lender can foreclose. Special rules apply for surviving spouses.
Seeking Professional Guidance
Handling repayment of a mortgage loan and tax obligations on an inherited home can get complicated quickly. Consult with an attorney that specializes in estate planning and elder law to understand your options and the processes involved.
A tax professional can also explain how to maximize deductions and avoid penalties when inheriting property with a mortgage. Their guidance can save you significant time, money, and frustration as you navigate this major financial transition.
While inheriting a home mortgage can feel like an unwelcome burden, taking the right steps can make the situation manageable. Learn your rights under federal lending laws, consider the pros and cons of selling versus keeping the home, and use available tax deductions to your advantage. With professional help and financial planning, you can smoothly handle repaying the loan and keeping up with taxes on your new inherited home.
Step 4: Buy out other heirs
If there are other beneficiaries who inherited a portion of the property, you may need to buy them out if you’re interested in moving into the home yourself. This process, known as an estate buyout, may require obtaining an appraisal of the home and its contents to determine its current value and coming to an agreement on the price that will be paid to the others for their share.
You may also need to take out a loan to access enough cash to pay off any other heirs in a buyout. Special types of financing for this process exist, known as probate or estate loans.
Step 3: Move in and assume the mortgage
The long-term options available include moving into the home and assuming the mortgage in your name, in which case you would simply continue paying the monthly mortgage bills.
If you decide to assume the loan and transfer the home’s deed to your name, the lender or servicer should be willing to work with you. This is because heirs have significant leverage in dealing with a mortgage in an estate situation, thanks to the Garn-St. Germain Depository Institutions Act of 1982 (Garn-St. Germain Act). The law provides protections for heirs, among other provisions, that can help them assume an existing loan.
Many mortgages, for instance, include a due-on-sale or due-on-transfer clause that requires full repayment of the loan in the event of a change in ownership. In certain estate situations, however, the Garn-St Germain Act prevents the lender from calling the loan, even if the mortgage includes such a clause.
#336 | Do you have to pay off the mortgage when you inherit a property?
FAQ
Can I deduct mortgage interest on inherited property?
What happens when you inherit a home with a mortgage?
Is mortgage principal repayment tax deductible?
Can you deduct interest on a mortgage?
The deduction allows you to reduce your taxable income by the amount of interest paid on the loan during the year, along with some other related expenses. There are limits on the amount of interest you can deduct based on your tax filing status and when you took out your mortgage.
How does a mortgage interest deduction work?
The mortgage interest deduction saves you more in the early years. At the end of each tax year, your mortgage lender or servicer will send a Form 1098 Mortgage Interest Statement, which discloses the amount of paid interest and points eligible for an itemized tax deduction.
Can a mortgage interest deduction help reduce your tax bill?
The interest you’re paying on your home loan could help reduce your tax bill. What is the mortgage interest deduction? The mortgage interest deduction is a deduction for interest paid on mortgage debt. People who take the standard deduction on their returns cannot take advantage of this tax break because it requires filing Schedule A and itemizing.
What happens if you inherit a home with a mortgage?
When you inherit a home with a mortgage, you’ll have two basic choices: sell it or keep it. Here are the pros and cons of each. If you sell the home, you can use the proceeds to pay off the loan. If there is any money left after satisfying the lender, you can keep the cash as part of your inheritance.
Can I deduct mortgage interest paid on a qualifying residence?
If you itemize deductions on Schedule A, you can deduct qualified mortgage interest paid on a qualifying residence, including your: Homeowners must be legally responsible for repaying the loan to deduct the mortgage interest.
How much mortgage interest can I deduct if I’m married?
If you are married filing separately, the limit drops to $375,000. If you bought the house before Dec. 16, 2017, you can deduct the interest you paid during the year on the first $1 million of the mortgage ($500,000 if married filing separately).