What to Do If You Inherited Property
Inheriting land is one of those things that most people dream about. You hear stories of someone suddenly becoming the sole owner of a large estate somewhere – it sounds like such a blessing and opportunity and it is hard not to get a little envious. But things aren’t always as they seem. Sometimes inheriting property can be a lot more work than what people bargain for. And in some cases, the risks might even outweigh the rewards. To explain it all, let’s imagine you just inherited property somewhere and now you’re looking for more information on what to do with it.
Common Situations for Inheriting Land
First, let us look at a few common situations that occur for someone to inherit land. The property in question will look very different depending on where it occurs in the country and how the former landowner used it.
Perhaps your family has owned a large family farm for generations, and it is now being passed down to you. Maybe you are even involved in a farming business there and plan to move into the farmhouse on-site. This is the best kind of land inheritance because there are memories and traditions all encapsulated in this one piece of property, and you have the opportunity to continue them with the land now in your hands. That is a truly special honor.
Or maybe someone in your family owned some recreational hunting land and left it in your name. This inherited property may or may not have any kind of structure or outbuilding for you to use. It might be a well-managed property with a history of timber harvests, or the property might only include the raw, undeveloped land as it has existed for centuries.
Tricky Situations for Inherited Property
As we mentioned, it is not always easy to be a landowner, especially if you are a surprise landowner. Here are a few times it can be downright tricky to inherit property.
- Inheriting property with siblings or other groups of people is a very common occurrence with family land, and it is one of the trickiest situations to navigate. Once multiple people with possibly different agendas get involved, everything is harder to do. Eventually, it gets further diluted among children, and the situation can really get confusing.
- Inheriting land with liens or outstanding mortgages is a bad deal. Just as you are looking forward to how you are going to use the new property, you find out that the former owner borrowed against it or has some outstanding loans to pay off. Unfortunately, you are now the one responsible for those issues. This does not happen often, but it is a possibility to be aware of.
- You not only inherited property, you inherited property taxes too. Similar to the bullet above, you are now responsible for paying the property taxes and other such fees as the new landowner. On very large properties, that can equal several thousand dollars per year, which you might not be able to afford.
- Not to overstate the point, but being a landowner has other responsibilities, including maintenance projects throughout the year. If a property is located far away, can you commit to driving back and forth and keeping everything going?
Decide What to Actually Do With It
The time to make big decisions on your inherited property is now. You basically have two options: are you going to sell it or keep it? And if you keep it, how will you do so?
If you do not have any emotional connection to the inherited property, do not think you will be able to maintain or afford it, or just are not interested, selling it is probably the best idea. Most of us could use a nice financial windfall like the one you could earn by selling it. But there’s a catch (of course). The trick with selling inherited property is to watch how it impacts your tax burden.
At the time the land switches hands, it will be assessed for its fair market value (i.e., what it is worth at that specific time). Since land typically increases in value over time, you would think it might make sense to hold onto it and sell it in the future for more money. But there is a capital gains tax on inherited property, which means that you are responsible to pay taxes on any increase in value from the fair market value. So if you are wondering how to avoid paying capital gains tax on inherited property, consult a real estate lawyer and try to sell it as soon as possible.
If you ultimately decide to keep the land, you will be responsible for maintenance expenses and for paying the property tax on inherited property. Unless you are already independently wealthy, you will probably need to find a way to make the land work for you so that you do not have to fork out more money to cover those expenses. Here are a few options you could consider.
- Direct Use – this option means you will actively manage the property to produce some kind of income. This might include row crops, livestock farming, forestry, etc. As an example from above, maybe you will continue the family farm by growing and selling row crops or cattle. Or if you have a lot more timber than pasture, you could hire a logger to harvest the trees from your inherited property to help pay for annual taxes.
- Leasing – if you do not think you will use it all that much but still want to keep it, leasing inherited land is a great option. Don’t have any farming experience? Leasing farmland is a nice way to continue utilizing the property as it was, but allow someone else to do it. There are also a lot of people looking to lease land for hunting, which might be a better fit for wooded, more remote properties. In some cases, people may want to lease your property for only a specific hunting season or for recreational use. You call the shots on how they can use it, and then reap the rewards of a nice side income from it to cover the annual property taxes. You can browse lease listings to get an idea of the range of lease options.
Although inheriting a property isn’t all sunshine and rainbows, there is a silver lining. If you can make the land work for you, suddenly becoming a landowner is a great path toward new passive income streams and passing it down to your own children someday.
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