Everything you need to know about inheriting property or passing your home onto your loved ones
Everyone who owns a home in the US should understand how our inheritance laws work.
Sometimes, the unthinkable happens and people pass away unexpectedly. When they haven’t prepared their assets properly, or the people receiving them don’t understand what to do with them – a lot of money can be lost. This money usually ends up going to the government.
Here is a quick guide to everything you need to know about home inheritance in the US.
Are inheritance laws State or Federal laws?
This first question has a straightforward answer. Inheritance laws in the US are governed by the State that you live in.
When it comes to the matter of property, the laws that you need to worry about are the laws of the state where the property is located.
So even if you live and pay taxes in Washington state, if the holiday home you are inheriting or passing on is in Maine – then it is subject to the State laws in Maine.
You should look into the property inheritance laws as soon as you buy the house, as it may be in your family’s better interest to be left the funds of selling the house after you die, rather than the house itself.
What should I do if I want to leave my house to someone else?
If you want to leave your home to someone else after you die, then the first thing you need to do is gain an understanding of your local inheritance laws.
These laws will not only detail the amount of tax that will have to be paid on any inheritance. But also which of your relatives will have statutory rights to claim inheritance after you died – particularly if your will is deemed unclear.
Once you understand these laws you will want to hire a lawyer and have the property written into your will. Your lawyers will be able to talk you through what each of the local laws means for the person inheriting your property.
At this point, you may find that the local property inheritance laws aren’t that favorable. If this is the case then you may want to look into having your estate (your lawyers looking after your will) sell your property after your death, and passing on the funds from the sale to your relatives, rather than the home itself.
Community Law vs Common Law
This is one of the most important laws to keep in mind when it comes to property inheritance.
In states that employ community laws, a spouse can inherit your property if there is a written agreement between the two of you.
In states that practice common law, it is not that simple. To inherit your property the spouse either has to prove that their income purchased the majority of the property. Or the deed to the property has to explicitly be left to them in the will.
If you intend for your spouse to inherit the property then you need to make sure that your papers are prepared from when you buy the property. Otherwise, they might not inherit it if something happens to you.
If you and your spouse are divorced then the rules are different, and you will need to discuss this with your lawyers.
What should I do if I inherit a home?
On the whole, inherited houses are seen as non-taxable items. However, some states do have different rules.
In most states, you will not be taxed for inheriting your parents’ or spouse’s property. In some states, you may be taxed if you inherit a house from a non-relative.
If you are asked to pay taxes, you will be subject to the tax laws of the state where the property is located, not where you live.
If there is a debt or a mortgage still left to pay on the house, then you will also inherit that. Therefore, if you cannot afford to pay this, or are not planning on moving into the house you may think about quickly selling your inherited house.
If you sell the house, you can use the funds to pay off the rest of the mortgage and keep the rest of the money for yourself.
However, you should bear in mind that the profits from this house might be counted in your capital gains tax – again, depending on which state you live in.