For most people, a home has more than just financial value. Over time, it will be filled with pleasant memories and emotional meaning. The desire to keep such a home within the family and pass it on to their children is a common goal. However, it is important to carefully consider both the advantages and disadvantages of holding onto assets so that future generations can continue to appreciate them.
Below, we detail some of these pros and cons and provide a basis for discussion within your family to find common ground about the best course of action.
Disadvantages of leaving children at home
Deciding what to do with the inheritance of a family home requires consideration beyond emotional attachment to the property. While it’s natural to hold on to cherished memories, be aware of the potential disadvantages of inheriting a home, considering factors such as housing mobility, location-related issues, ongoing expenses, and family structure. It is essential to do so.
Cons: Illiquidity limits options and increases risk
Homes are considered illiquid assets, meaning they cannot be quickly converted into cash and their value is subject to fluctuations in the real estate market. This lack of liquidity poses a challenge for heirs, especially if the market takes a downturn while you’re planning to sell your home.
Unlike stocks and cash, a home cannot be easily divided or sold in parts to provide financing as needed. It’s an all-or-nothing situation. When multiple siblings or family members are involved, the division of assets becomes more complicated because the home is less liquid. They face the choice of selling the entire property and splitting the proceeds, or reaching an agreement where one of the brothers buys out the other brother’s share.
In scenarios where the child wants a quick response and resolution, the extra complexity associated with inheriting illiquid assets can be a cause for concern.
Cons: Location, location, location!
You might think that everyone would eventually dream of living in Pittsburgh, Pennsylvania (insert your city here), right? (I say this jokingly as a lifelong Pittsburgh resident!) However, this is not always the case.
If the inherited property is not located in a location that suits the heir’s lifestyle, career, and personal preferences, there may be disadvantages. This can limit your options and flexibility, especially if you were hoping that someone would consider living in the home you inherited.
Even if the child decides to sell, if the location is undesirable, demand will decrease, the sale period will be extended, and the child may accept a lower asking price. Renters also generally prefer more ideal locations, which can present greater challenges if you choose to rent. In less desirable areas, higher vacancy rates and lower rents can be potential problems.
Note: Are you thinking of moving to a more desirable city or state in the future? NewRetirement Planner allows you to model a move to another state (such as one with no state income tax) and understand the impact on your retirement plans. can be determined.
Cons: Unexpected burden of ongoing expenses.
Many of us have experienced the fact that home ownership can become very expensive over time. When you add up costs like mortgage payments, utilities, home insurance, property taxes, maintenance, and repairs, you can end up with a large monthly financial burden that you didn’t have to manage before.
Even if you pay off your home in full without a mortgage, these ongoing expenses can add up quickly. Additionally, if your child does not have a solid financial foundation, such as an emergency fund or large cash reserves, residing in the property may worsen their financial situation.
To illustrate this, let’s consider an example. You live in Ft. Lauderdale, FL In just a few decades, your home’s value has increased significantly to $800,000 and you’ve completely paid off your mortgage. Your only child lives in the Northeast, where the climate tends to be (much) colder year-round. You may be imagining happily inheriting a home in a warm, sunny climate and eventually turning it into a family vacation home, but when you dig deeper into the costs, you’ll find that you’ll be spending a lot of money each year, including: Expenses will be revealed.
- Property tax: $9,600
- Utilities: $5,400
- Home insurance: $2,500
- Maintenance and repairs: $8,000
Estimated total annual cost: $25,500
Realizing that the upkeep costs are significant and adds an estimated $2,125 per month, it may be more economical to revisit a favorite childhood destination and enjoy Florida multiple times throughout the year rather than take on the responsibility of a family. You may conclude that it is wise to do so. Continue to protect the house you inherited.
If you’re using NewRetirement Planner’s advanced budgeting feature for PlannerPlus subscribers, you’ll be prepared to outline these ongoing costs as part of the conversation with your family about leaving your home as an inheritance. It would have been.
Cons: Potential conflicts due to family dynamics and shared inheritance
Inheriting a family home may sound like a heartwarming prospect, but it can cause conflict between siblings and family members. Disagreements over how real estate should be used, sold, and managed can cause tension in relationships. Furthermore, many of these differing opinions are influenced by each sibling’s unique experiences within the family over the years and carry significant emotional weight.
When multiple siblings inherit a home together, some of the key questions to address include:
- If you decide to keep your home, you need to establish a way to fairly share the costs. This becomes especially complicated when siblings have different financial means, live in different areas, and have different lifestyles.
- When siblings are spread out in different locations, it becomes a challenge to distribute responsibilities such as maintenance issues, repairs, and other time management.
- For large-scale renovations, determining each sibling’s contribution is essential for smooth coordination.
- Timing is an important factor when considering selling your home. Each sibling’s emotional readiness may be different, creating potential conflict over when is the best time to sell.
- If you choose to rent a house, the question arises as to which sibling will take on the role of landlord and understand the time commitment that comes with that responsibility.
Without a clear written agreement detailing the conversion of multiple families and how the shared home will be used and allocated, selling the home is the best way to maintain harmony between siblings and maintain family relationships. could be the best solution.
Advantages of inheriting the family home
The news that they will inherit a house shouldn’t be at all daunting for children. There are also some benefits to consider.
Pros: Preserve family memories
By entrusting the family home to children, children can have long-term happy memories and emotions in the home. Your kids probably have a lot of holiday celebrations and Sunday dinners associated with that house. They may want their grandchildren to play there someday, too.
Your child may also have memories of deceased family members in their home and may find solace in keeping them there during moments of grief over the years. The thought of strangers living there may be unbearable.
Emotional connections are far more important than the practical reasons for selling a home, and preserving your property allows you to honor the past while creating new memories for the future.
For many people, the home that their family lives in for generations is irreplaceable. No dollar value can capture what it truly means.
Pros: Accelerate your child’s financial goals
Perhaps your child has always dreamed of owning a home, but with all the bills and responsibilities in their life, saving up for a down payment may have been a little difficult. Now, imagine this. Inheriting a home can save you the hassle of making a down payment and say goodbye to worrying about your monthly mortgage. Helping your child reach their financial goals by eliminating all the usual obstacles is a win-win for everyone involved.
Or let’s say your home is in a great location with nice weather and you’ve always had the goal of buying a vacation home in the area for your children. After considering the ongoing costs, it became clear that the inherited property could be seamlessly transferred to a designated family holiday home.
If the inherited home meets your needs, it can be a cost-effective way to meet your existing objectives.
Pros: Potential for future appreciation or rental income.
Even if you leave your home to your children as an inheritance, chances are they will ultimately have the final say on what happens to it. This includes selling or renting real estate, each of which comes with its own benefits.
Pros: Property tax and capital gains tax sale
Inheriting real estate may provide tax benefits.
Typically, when adult children inherit the family home from their parents, they often benefit from a tax “step up.” This adjusted cost basis is typically determined as the market value of the property on the date of the parent’s death, but there is also an option for the estate to select a different valuation date (usually six months after death).
example:
- You originally purchased your home for $300,000.
- When you pass, the house will be worth $700,000. This will be your child’s cost basis, or “starting point,” for tax purposes if they sell the home in the future.
- If the child decides to sell the house after one year when the house is worth $750,000, then the difference between the cost basis of $700,000 and the sales price of $750,000 is $50,000. You will only pay taxes.
Because most inherited homes appreciate in value over time, this increased threshold can reduce the amount of capital gains tax your child will have to pay if they sell the property in the future.
Note: Use the One-Time Expenses section of the NewRetirement Planner to ensure you account for one-time expenses such as potential capital gains taxes and selling costs when you sell your home in the future.
Pros: Rent it and keep it with your family.
Additionally, if your children want to become landlords, inheriting real estate can provide long-term financial security. Rather than selling inherited property or using it for your own use, you can rent out your inherited property to earn ongoing income.
The local rental market plays a key role in this decision. For example, if your home is located in a popular vacation area with strong rental demand, your potential income could be greater.
If you don’t have time to manage the property for your children, you should budget for a rental management company. In that case, you need to calculate whether your rental income is sufficient to pay those fees and still have positive cash flow.
Another idea is to use the house personally part-time and rent it out for the rest of the year. This dual use allows you to offset the cost of ownership while leaving the asset in your family.
let’s continue the conversation
As you can see, many points of discussion arise when considering the possibility of leaving the house as an inheritance for children.
Ensuring that you have an open conversation with all family members without any surprises is key to making the best decisions for both you and your children about your family’s future.
When it comes to financial decisions, both you and your heirs can run through scenarios in NewRetirement Planner to make more informed decisions.
