Inheriting real estate can come with benefits and an abundance of decisions to be made, and inheriting land is no different. For some beneficiaries, they know exactly what they want to do with their new inherited land – sell it, hold onto it, build on it or even lease it. For others, it can be difficult to make a decision, especially if there is an emotional connection with the land or when other family members are involved.
Since we’re in the business of land, we’re here to help you sort through the process of deciding how to handle your inherited land. Here are just a few things to keep in mind to help you come to a sound conclusion.
Inheriting Land instead of a House
If you’ve inherited land, you may find that you’re facing some different considerations when compared to inheriting property with a home on it.
At the core of the difference is that the lack of a house means that you neither have a dwelling for you to use while enjoying the land, nor do you have an opportunity for easily renting out the property for income. On the other hand, the lack of a home may a blessing because it means there will be less maintenance and upkeep.
You’ll need to undertake these kinds of considerations to help you determine if your new land is going to be an incredible opportunity – financially and otherwise – or a headache. Let us help you evaluate:
What Costs & Taxes are Involved?
When evaluating how this inheritance affects you, and whether to hold onto the inherited land or sell it, it’s important to know what costs may result from your new property.
Many outstanding obligations of an estate often are settled after the death and during the administration of the estate by the executor and the courts. But depending on the value of the estate, the relationship of the beneficiary, how the estate was settled and other factors, some obligations can remain even after the estate is processed. And, there always are other costs (unrelated to the inheritance) that just are a fact of land ownership in general.
Death & Taxes
The complicated stuff first…the tax treatment of inherited land can be tricky and may vary from state to state. As a beneficiary, consult with an experienced tax attorney and accountant to fully understand the most up-to-date legal and tax implications of your inheritance.
Estate taxes and inheritance taxes sometimes are called “death taxes.” Some beneficiaries are pleased to find that, in their situation, inheriting land did not trigger any death taxes that affect them. This typically is the case in estates that fall below exemption thresholds (now at a $5 million baseline) or when there are enough liquid assets in the estate to pay any estate taxes. Work with an attorney if you find out that there are outstanding unpaid estate taxes for the estate at issue, so you can learn if it impacts you and the property you inherited. Likewise, keep in mind that an inheritance tax is a different death tax that a few states impose on beneficiaries, based on the value of their inherited property.
In addition to death taxes, some beneficiaries wonder: Will I be liable for income taxes when I inherit property? The short answer is that just receiving land as an inheritance usually will not trigger income taxes for you, but you will owe capital gains taxes if you sell the property later at a gain. Significantly, this tax would only be applicable to the difference between the fair market value of the land when the benefactor died and what you sell it for.
When you inherit Uncle Bob’s land you also inherit any remaining liabilities and liens on the property. A borrower’s death does not eliminate an outstanding mortgage on the land. In fact, be aware that in some mortgages the death will cause the entire loan to become due. If you decide that you can’t afford to pay the mortgage – or just don’t want to – you may want to consider selling your inherited property, negotiating with the lender or even allowing it to go into foreclosure.
HOA or Community Fees
If you inherit a lot in a planned community you likely will learn that there are homeowners’ association (HOA) fees related to the property, even though there is no home. You may be liable for prior unpaid HOA fees, and will be responsible for new fees going forward. Failure to pay HOA fees can result in liens on the lot, or even foreclosure in some scenarios.
Real Estate Taxes
The impact of property taxes is another important aspect of inheriting land that often is initially overlooked. First, any unpaid property taxes must be paid. Likewise, as the landowner you are responsible for new real estate taxes going forward. And, in many states the transfer – even though by inheritance – may trigger a reassessment that causes the land’s taxes to be higher for the new owner. Failing to pay property taxes can cause you to lose the property in a tax sale.
Ongoing Maintenance & Insurance
Inheriting land also means you have gained the responsibility of being a landowner, including maintaining the property (even if it’s 300 miles away from you). Whether it’s cutting the grass, securing the property, cleaning up after illegal dumping, preventing trespassers or taking care of a home or other buildings on the land, owning land has its responsibilities. And as a landowner you should carry insurance on the property to protect you from liability and to cover the risk of loss to any homes or other structures.
Should I Hold Onto My Inherited Land?
Holding on to inherited land is a popular decision. Land received by inheritance is often “family” land that has been passed down and has an emotional attachment for family members. Preserving the old family farmland or that lake property where your grandfather taught you to fish may be a no-brainer, especially if you can afford the associated costs. Even if there is no sentimental attachment to the land, an analysis of the real estate value may show that it’s a worthwhile investment to hold on to – either to cash in on down the road or to pass along to future generations.
Should I Build a Home on My Inherited Land?
If the inherited land is something you see yourself living on, or perhaps visiting as a vacation destination, this may be your golden opportunity to build the home of your dreams. Inheriting land may give you the freedom to build the home you want, with many building professionals and contractors to help you along the way. Building a home can be very time-consuming yet rewarding process, so choosing the right builder is essential in this process.
If you decide to build a home on the property but have more land than you want or need, you may want to consider subdividing your land. Also, when deciding to build a home on your land, you may want go through our tips for buying land to determine what needs to be done and how ready you are for the project.
Should I Sell My Inherited Land?
Selling your inherited land can yield benefits like a cash windfall, or allow you to invest that money in an asset that provides an income stream. And if you sell soon after the benefactor’s death, there is likely to be little or no taxable capital gain for you, as the property’s value is unlikely to have changed much since the death. But when it comes down to it, your own circumstances likely will dictate whether you need or want to sell your newly inherited land. Will owning the land be a financial burden or… an improving investment? Is the property located too far away…or is it just far enough away to be a retreat for your family? Does the property require too much upkeep and maintenance…or is it fairly easy to maintain? Do you need the money…or are you able to keep it invested in this property? Do you need to pay estate or inheritance taxes…or is the land free and clear? And so on…
If you wish to consider selling, you should first start by contacting a real estate agent to help evaluate the land and, if desired, sell your land. They can assist you in determining a potential sales price and creating a marketing plan. You also may need to engage other experts, like surveyors, appraisers, environmental consultants, real estate lawyers and accountants.
Be aware that selling vacant land has its challenges, and usually takes longer than selling a house (where there is a larger market of home buyers who are ready to move in immediately). So be patient. You and your agent should market your land to a targeted audience of lot and land buyers to increase your likelihood of a successful and speedy sale.
Get your ducks in a row. Be prepared to sell your inherited land by confirming that the land’s ownership and title has been properly cleared. This may be an issue if multiple beneficiaries are involved. Also, make sure your land is ready to be shown and in good condition – first impressions are very important!
Inheriting land can be a dream come true or a burden, depending on the situation. Whether the property is family land with history and a sentimental attachment or simply an investment property that has been passed along makes a big difference. Also, the financial implications of a inherited land can vary widely, from a “windfall” of a valuable parcel of land that is free and clear of debt, to a piece of land burdened with a large mortgage and unmanageable taxes. Both emotional and financial considerations will be at play when deciding what to do with inherited land, but knowing the facts about costs and responsibilities, as well as tips for keeping, selling, building and subdividing should help you in making the best decision possible. Best of luck to you!