Our situation: My husband and I are in our early 40s with 3 children age 2-11 years old. My husband is currently the sole provider, I manage the children and the household. We make about 65k per year. We have used vehicles and a modest home with a great interest rate that we have been paying off aggressively. We live within our means and have no credit card debt. I have student loans but they're all federal (not private) and under control. I have a small annuity from my late mother's pension.
Recent developments: My husband's grandmother passed away at the age of 94. She was a terrific woman and we're all grieving her loss. My husband, as a young boy, asked for her house. It was his dream, and then ours together, to one day live in that home. Alas, we rented for 10 years while waiting for it and eventually decided to buy our own house as our children were growing up in a small apartment and we were throwing away money in rent. We've been in this house for almost 5 years and it is truly home now. We lived a lot of life here in those years and cannot see leaving it without breaking our hearts.
So now we're left with the conundrum of the 2nd house. We are grateful but this presents a number of problems for us. For starters, this represents all we will get as any inheritance moving forward. My husband's parents have declared they will be leaving their much more valuable home to my husband's sister and we will get no part of that. We get the grandma's home and all the rights and responsibilities that go with that and nothing else.
As we are not rich, we are concerned about costs associated with maintaining the 2nd home. Doing nothing but the basic property taxes, home insurance and utilities would run us around 10k per year. To say nothing of the fact that the home is not in particularly good shape and would need a lot of work done to increase its value. For instance, the kitchen has the original 1940s metal cabinets. Every wall and floor would need redoing owing to outrageous wallpaper and orange shag carpets.
We are considering renting it out but we would have to invest in the house to make it liveable. We have no experience as landlords and aren't ruthless business types. We have busy lives with 3 young children and not a lot of fix it know-how. The house is just around the corner within walking distance.
Even if we do some updates to it, I think we could maybe get $1600/month in rent (which would of course be taxable income, possibly cause us to lose some state help, drive up student loan payments, etc). After operating costs. I think we'd be lucky to pocket half of that. That's a lot of work and risk for so little return.
Complicating things further, my husband and I were named as co owners 6 years ago with lifelong tenancy rights to my husband's grandmother. As we have already been named as owners for years, I assume any capital gains will be heavily taxed as the property cannot be "stepped up".
This is an amazing gift but unfortunately feels like a terrible weight. If we sell, our family won't be happy. They have said it's ours to decide but they'd prefer it remain in the family. If we sold it, we would make enough money to either pay off our mortgage entirely or invest it to make more money for our future. But we'd lose a lot of the profits in the selling process and through taxes. There's also the emotional impact of selling it as my husband would be heartbroken over its loss and having to witness someone else move in. There also has been talk off giving it to our children but I don't think we're in the right tax bracket to simply hold a property in trust for our children with no benefit to ourselves.
Advice? Suggestions? Kick in the pants? Thanks.
Edit: We bought our house for $200k, a steal in this neighborhood. We're down to $150k owed now. We could sell it for $300k if we marketed it as a 4 bedroom house. Grandma's house in its current condition would probably net $225-250k owing to its larger lot.
Inherited a paid off house
byu/No-Veterinarian946 inpersonalfinance
Posted by No-Veterinarian946
11 Comments
What is the resale value of the house?
Ask yourself: if you had that amount in cash right now, would you spend it on that specific, exact house?
If the answer is “no, we’d do ______(literally anything else with the money)”, then you should sell it.
If your husband is heartbroken over it, well, have one last visit and send it off. Being a small time landlord can be bad. If you get a nightmare tenant, who refuses to pay rent, damages the property, it can bankrupt you.
Get a local realtor, have them give you an honest assessment, and put it up for sale.
In case you haven’t considered it- Could you move into that house and rent out your current one?
Because your in-laws have removed you from their will, making them happy should not be on the list of complications. Can you move to the new house, rent your current one, and use the extra money to make updates as you can afford them? If that doesn’t sound acceptable, just sell the house. The house doesn’t care who lives in it; the memories are your husband’s and they live with him.
Real estate can be a mediocre investment unless you live in the house. Prop tax, maintenance, insurance add up. And then you pay tax on rental income.
Sure, you can recoup some costs if you don’t have major events.
Talk to a tax pro to calculate your potential capital gain liability.
FWIW, I sold my investment property. With that I was able to clear out my other debts. In all, I’m ahead.
Sell the house. Don’t over complicate things
I’d offer family the first chance to buy, but either way it’s getting sold. If this upsets your family, that’s unfortunate, but you’ve got to do what is best for your immediate household..
Sell whichever house you don’t want.
I know this seems like a really difficult conundrum but that’s only because of the emotional angle. The practical and economic side is very simple.
Figure out how much it would be to renovate Grandma’s house to be suitable by getting quotes from a couple of general contractors. Then, either do that and sell your current house, or sell Grandma’s house and let the buyer worry about the renovations.
I know you’ve been dreaming of living in that home, but… is your dream really about a home? Or a life? If it needs so much work, would it really even feel like the same home afterwards? Most people – not all, but most! – in your position really should just keep the house they live in, sell the inherited house, and use the proceeds to further the goals they really have, like financial independence, a stronger emergency fund, kids’ education, etc.
Slightly off topic, and I know it depends on your idea of a “great” interest rate – but if you have a loan under 3.5% (2021 rates were 2.96-3.15%) why are you aggressively paying it off? Would it make more sense to invest the extra payments?
FYI, leaving the grandmother with a life estate until death means you DO get a basis adjustment to fair market value on her date of death. If you don’t want to pay for an appraisal to determine that value, pull the Zillow, Redfin and Realtor estimates and use an average of those (or the highest one).
I’d move into the grandmas house and rent your place. Make improvements over time and do as much of them as you can yourself. If you decided to sell later, it’s your primary residence and you’d avoid a lot of tax burden. With a purchase price of 200k at a decent interest rate, you’re very likely to be able to cover the cost of your house by renting it, and net some per month. On one income, with depreciation and deductions for children, your tax burden would likely be pretty low. And if it doesn’t work the way you hope, move back. By then the family will have at least seen you try it, and if you give it a couple years, you’ve saved a ton in taxes if you sell.