The Pros and Cons of Inheriting a House: Learn How to Make a Good Plan for Your Heirs

For most people, a home has more than just financial value; Over time, it becomes filled with fond memories and emotional meaning. The desire to keep such a home in the family and pass it on to your children is a common goal. However, it is crucial to carefully consider the pros and cons of inheriting a home. There are certainly pros and cons to preserving a property to ensure that future generations can continue to enjoy it.

Below, we detail some of these pros and cons, providing a basis for discussion within your family to find common ground on the best course of action.

Disadvantages of leaving home to children

Dealing with the inheritance of a family home involves considerations that go beyond emotional attachment to the property. While it's natural to preserve cherished memories, it's important to acknowledge the potential disadvantages of inheriting a home, taking into account factors such as the home's mobility, location-related challenges, ongoing expenses and family dynamics.

Cons: Lack of liquidity limits options and increases risk

Homes are considered illiquid assets, meaning they cannot be quickly converted into cash, and their value is affected by changes in the real estate market. Lack of liquidity creates challenges for heirs, especially if there is a downturn in the market when they plan to sell their home.

Unlike stocks or cash, a home cannot be easily divided or sold to provide funds as needed – it's an all-or-nothing situation. The illiquidity of a home makes dividing assets more complicated when multiple siblings or family members may be involved. They were faced with a choice: sell the entire property and split the proceeds, or come to an agreement in which one sibling buys out the others.

The additional complexities associated with inheriting illiquid assets can be a cause for concern in situations where your children may want to act and resolve issues quickly.

Cons: Location, location, location!

You might think that everyone ultimately dreams of living in Pittsburgh, Pennsylvania (insert your city here), right? (As a lifelong Pittsburgh resident, I say that half-jokingly!) However, that may not necessarily be the case.

If the inherited property is located in a location that does not suit the heirs’ lifestyle, career or personal preferences, there may be adverse consequences. This may limit their options and flexibility, especially if you want them to consider living in an inherited home.

Even if your child decides to sell, a less-than-ideal location may cause a drop in demand, resulting in a longer sale and acceptance of a lower offer. It can also create greater challenges if they choose to rent, as renters often prefer more desirable locations. Higher vacancy rates and lower rental rates can be potential problems in less desirable areas.

notes: Considering yourself a move to a more desirable city or state in the future? The Boldin Retirement Planning Tool allows you to model a move to another state (such as a state that may not have any state income tax) to determine the impact on your retirement plan.

Cons: Unexpected burdens from ongoing expenses

Many of you may have experienced the fact that owning a home can become quite expensive over time. Mortgage payments, utility bills, home insurance, property taxes, maintenance, repairs, and more collectively represent a significant monthly financial burden that your child or children may not have had to manage before.

Even if the home is paid off in full without any mortgage, these other ongoing expenses can add up quickly. Additionally, if your children lack a solid financial foundation, including an emergency fund or a large cash reserve, living in the property may strain their finances.

To illustrate this, let's consider an example: You live in the Ft. Fort Lauderdale, Florida Over the decades, your home's value has appreciated significantly to $800,000, and you have paid off your mortgage in full. Your only child lives in the Northeast, where the weather can be (very) cold year-round. While you might imagine that they would happily inherit a home in a warm, sunny climate that they can eventually use as a family vacation home, a closer examination of the expenses reveals the following annual expenses:

• Property taxes: $12,000
• Utilities: $4,800
• Home Insurance: $10,000
• Maintenance and repairs: $12,000

Estimated total annual cost: $38,800

After realizing the high cost of maintenance (expected to cost an additional $3,233 per month), they may conclude that it is more financially prudent to travel to Florida multiple times a year to revisit their favorite childhood spots rather than take on the responsibility of maintaining an inherited home.

If you use the detailed budgeting feature that Boldin Retirement Planner offers to PlannerPlus subscribers, you may already be ready to outline these ongoing expenses as part of the conversation with your family about leaving your home as a legacy.

Disadvantages: Potential conflicts in family dynamics and shared inheritance

Although inheriting the family home sounds like a welcoming prospect, it can stir up conflicts between siblings and family members. Differences in opinion about how the property should be used, sold or managed can strain relationships. Additionally, many of these diverse perspectives carry significant emotional weight, influenced by each sibling's unique experiences at home over the years.

When multiple siblings jointly inherit a home, key issues that need to be addressed may include:

• If you decide to keep the home, you'll need to establish a fair method of spreading the costs. This becomes especially complicated when siblings have different financial means, live in different areas, and lead different lifestyles.
• When siblings are spread across different locations, it can be a challenge to allocate responsibilities, such as managing maintenance issues, repairs, and other time commitments.
• In the case of a major renovation, identifying each sibling's contribution is critical to smooth collaboration.
• When considering selling your home, timing becomes a key factor. Each sibling's emotional readiness may differ, leading to potential conflicts over when is the best time to sell.
• Choosing to rent raises questions about which siblings are willing to take on the role of landlord and understand the time commitment associated with this responsibility.

Without multiple household changes or a clear written agreement detailing how the shared home will be used and divided, selling the home may be the best solution to maintain harmony between siblings and preserve family relationships.

Benefits of inheriting a family home

For your children, the news of inheriting your house shouldn't be completely daunting. There are several advantages to consider.

Pros: Preserves family memories

Leaving a family home to your children allows them to continue to embrace their happy memories and feelings over time. Your kids probably have plenty of holiday celebrations and Sunday dinners related to that house. They may hope their grandchildren can play there one day.

Your children may also have memories of deceased family members in the family and seek comfort by preserving them during sad times over the years. The thought of strangers living there can be overwhelming.

The emotional connection far outweighs any practical reason to sell your home, and keeping the property honors the past while still creating new memories for the future.

For many people, a family home that lasts for generations is priceless. No dollar value can capture its true meaning.

Benefits: Accelerates achievement of your child’s financial goals

Maybe your kids have always dreamed of owning a home, but life's whirlwind of bills and responsibilities can make saving for a down payment a little challenging. Now, picture this: Inheriting a home means they can skip the whole down payment hassle and say goodbye to monthly mortgage worries. Allowing your children to achieve their financial goals without all the common roadblocks is a win-win for everyone involved.

Or, let's say your home is in a great location with a great climate, and your kids have always had a goal of buying a vacation home in the area. After examining the ongoing costs, it became clear to them that the inherited property could transition seamlessly into a designated family vacation home.

If the home they inherit meets their needs, it could be a cost-effective way to achieve their existing goals.

Pros: Potential for future appreciation or rental income

Even if you leave your home as an inheritance to your children, ultimately, they may still have the final say on what to do with it. This can include selling or renting the property, which has its own advantages.

Pros: Sale of property and capital gains tax

Inheriting real estate may provide tax benefits.

Typically, when adult children inherit the family home from their parents, they typically benefit from a “step up” in their tax basis. This adjusted cost basis is typically determined as the market value of the property on the date of the parent's death, although the estate may choose an alternative valuation date (usually six months after the death).

an example:

• You originally purchased your home for $300,000.
• When you die, the house is worth $700,000. If your child sells the home in the future, this will become the cost basis, or “starting point,” on your child's tax return.
• If your children decide to sell the home a year later, when it is worth $750,000, they will only have to pay taxes on the $50,000 difference between the $700,000 cost basis and the $750,000 sales price.

Since the value of most inherited homes increases over time, this increase in basis can reduce the amount of capital gains tax owed if your child sells the property in the future.

notes: Tax laws may change. Before making a decision, be sure to verify current federal and state regulations or consult a qualified tax professional. Also, keep in mind that estate and inheritance taxes vary from state to state.

If you anticipate selling your home in the future, you can use the Boldin Retirement Planner's one-time fee section to calculate potential capital gains taxes and sales costs.

Pros: Keep it in the home by renting it out

Additionally, inheriting real estate can provide your children with long-term financial stability if they want to become landlords. Renting an inherited property can provide ongoing income rather than selling it or simply using it yourself.

The local rental market will play a large role in this decision. For example, if the home is located in a popular resort area where rental demand is strong, the income potential may be great.

If your children choose to rent a property long-term, they will need to consider landlord responsibilities, rental income tax reporting and maintenance costs (or management company fees). Incorporating these factors into their plans will determine whether renting makes financial sense.

Another idea is to use the home part-time personally and then rent it out for the rest of the year. This dual use can help offset the cost of ownership while still keeping the property within the family.

keep the conversation going

As you can see, exploring the possibility of leaving home as a child’s legacy raises many discussion points.

Ensuring an open dialogue with your entire family and avoiding surprises is key to making the best decision for you and your children about the future of your family home.

For financial decisions, both you and your heirs can run scenarios in the Boldin Retirement Planner to help you make smarter decisions.