At first, inheriting property sounds like winning a prize. It’s hard to imagine it could become a major hardship. Yet, there’s real potential for an inherited home to become a financial burden.
Transfer of property for beneficiaries who aren’t the surviving spouse can be a long process. It’s especially tough when you’re already facing the loss of a loved one. If you need the inheritance to relieve your own finances, it can be a difficult time.
Costs appear in the form of legal fees and inheritance tax. If the home has a mortgage or requires maintenance, expect more expenses. For some people, it may not be financially possible to keep an inherited property.
This article examines the potential financial drain you must consider when you inherit property.
Let’s look at ten things that affect inherited property. It’s important to understand each one to decide if your inheritance is an asset or liability.
Is the Will Valid?
The first step is to determine if the deceased person has a valid will. Australian law provides that anyone is free to make a will as he or she chooses. There is no reserved part of the estate required to go to a certain person. Yet, someone may challenge a will if the deceased was morally obligated to provide for them.
When someone dies without a will, certain rules apply to the estate. It depends if there are a spouse, common-law spouse, same-sex partner, or descendants. Extended family is eligible when no immediate family exists. If there are no relatives the estate goes to an Australian State government common fund.
Australian Inheritance Laws
When you inherit in Australia, the location of the property determines jurisdiction. At the time of the property owner’s death, the local Australian laws apply. Religion, residence, and nationality of either the deceased or beneficiaries don’t apply.
The law recognizes foreign marriages. But, it doesn’t matter if the couple married in another jurisdiction. If there are disputes over the inherited property the matter goes to State Court. The estate’s value determines which court hears the dispute.
Australian citizens don’t have to pay death duties or inheritance taxes. In 1979 all the states in Australia ended the inheritance tax known as death duties. State and territory laws regulate wills and inheritance. Yet, there are some federal taxes. The assets you get from an estate may be taxed under the Capital Gains Tax.
A Capital Gains Tax is due as part of your income tax. A Capital Gain is an increase in the value of an investment or real estate that makes it more valuable than the purchase price. You aren’t taxed on the increased value until the asset is sold. When the asset is sold you must claim the financial gain on your income taxes.
Get a Professional Valuation
It’s essential that you get a professional valuation of the property. You want to determine the fair market value at the time of death in case you sell the property. Get a building survey at the same time.
Consult with an accountant to review tax implications. How does ownership, or selling the property, affect your financial situation.
Look at the big picture. Does it make sense to spend money on the property now in exchange for a financial payoff later? Or, is selling the property a better decision?
Is a Mortgage Attached to the Property?
If the inherited property has a mortgage you need to pay it. Some mortgage agreements require immediate repayment of the loan after a death. If the loan provisions allow for survivorship of the loan via a trust or deed, the loan remains in effect.
The beneficiary has to consider how much it costs to pay property taxes and the mortgage.
Whether you decide to sell the home you inherit, or not, you must have property insurance. This will protect you against any type of loss or liability related to the property.
Consult a Real Estate Attorney
It’s a smart move is to consult a real estate attorney to discuss the pros and cons of your property inheritance.
Whether you’re inheriting a house that’s paid off, or one with a mortgage, a real estate attorney can help. If you want to sell, the attorney can assist with determining a price and terms for a sale.
One of the main issues, when you inherit a property is clearing the property title. It’s especially hard if there’s more than one beneficiary. One person may want to sell while others don’t.
A real estate attorney fees are worth every penny if you avoid ownership disputes. A lawyer handles legal transactions and prevents problems between family members.
Keep or Sell the Inherited Property
Generally, a home in Australia is exempt from tax. But, there are situations when you have to pay additional taxes. For example, if you plan to:
- Use Your Inherited Home as an Investment Property
- Renovate the Home and Flip It
- Deal in Land
- Use the Property to Run a Business
Any of these situations can result in income, capital gains or services taxes.
Rent the Home
Another option is to rent the property. If there is more than one beneficiary, everyone should agree on the rental plan.
Renting the property allows you to gain income from the property. The rental income will reduce your costs.
Refusal of the Inheritance
This option isn’t discussed often, but it’s a choice you can make. If you refuse the inheritance you won’t be responsible for the property. That means you won’t assume ownership or the associated costs.
Emotional Consequences of Inheriting Property
How you handle inheriting property is a personal matter. Your emotions may influence your decision. Many people feel a sense of responsibility to keep and maintain the property at any cost. This is common when a parent, spouse or sibling owned the home.
You may want to keep your childhood home or wait to sell when the real estate market improves. Maybe you want a steady rental income stream. Whatever you choose, consider all the financial implications. And don’t forget to keep accurate records for tax purposes.
Consult the Professionals for Advice
Inheriting property doesn’t have to be problematic. Make sure you get solid professional advice. Learn what other homeowners think about real estate investments on the PropertyTalk forums. You’ll find information on financing, insurance, and legal issues.
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