Inheritance of family home

[realtor]

Inheritance of the family home by the only child and sole beneficiary brings up tax questions and best use of windfall. The value is $500,000 and there is no loan. Would it be best to sell the home or continue with the nice tenant already in place. Income is $2,300 per month.

There is no inheritance tax but what about capital gain? 2010 is the year of the inheritance.

[Diane Kennedy]

Emotion aside, I would approach this like a typical investment analysis.

If you sold the home, how much would you actually put in your pocket? I'm guessing it would be somewhat less than $500,000 due to costs associated with the sale.

Let's just say (for purposes of the example) you ended up with $480,000 in your pocket. That's assuming that you inherited the property at current basis. If you inherited in 2009, you would have inherited at decedent's basis, which would probably mean you'd have tax to pay on the sale.

Now, let's look at what your net profit actually is on the property. Even though the house is free and clear, there are are still property taxes and you need to factor in something for repairs and a vacancy factor. So, again for the sake of the example, let's assume you end up $2,000 per month, or $24,000 per year in your pocket.

That's not taxable income, because you get to take a deduction for depreciation.

But at any rate, your return, with all of these assumptions is $24,000/$480,000 per year or 5%. I'd say not bad. It changes, of course, depending on the amount you'd realize from the sale, what your net profit actually is on the house and the tax considerations.

[wayside]

I think first they need to decide if they are cut out to be a landlord. Do they have to backbone to have a hard conversation if the rent is late? Can they raise the rent without feeling guilty? What if they have to evict? How will they react to a 11:00 PM on a Saturday night call that the furnace is not working? Do they have any idea what the laws are for renting property? Any lead paint in the house?

I doubt they will clear $2000 on a $2300 rent. I bet taxes plus insurance will be way over $300/month. Does the owner pay any of the utilities, or is the tenant paying everything? Have they factored in extra liability insurance?

How much deferred maintenance is there? A new roof could blow a whole year's profits, which you probably won't get back when you sell. How old are the furnace and windows?

If your client really wants to get into landlording, a better option might be to sell the house and and use the proceeds to invest in properties with a higher return. A 3 to 5% return might look good compared to today's bank account rates, but one major repair or tenant problem can completely blow that up.

[realtor]

Mother died in 2010. She occupied the home since 1942, except for the last four years. A tenant was put in place in 2007. I am the Trustee and the last survivor of the family. Are there Capital Gains Taxes due? The new basis at time of death is $500,000 and there is no mortgage.

[Diane Kennedy]

In 2010, there was no tax due on inheritances, BUT you inherited without the stepped up basis. There is an exception to this if the estate is under $1.3 million.

Normally I hate to cite the IRS, but this time I will. Check out: [url]http://www.irs.gov/businesses/small/article/0,,id=224515,00.html
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You may want to talk to the executor of the estate or your tax preparer to find out exactly how this works in your case.

If you have a stepped up basis, then there is no tax due upon sale. If you do not, there will be tax due.