Inheriting a home is becoming an increasingly common financial-planning issue. Last year, inherited homes accounted for nearly 9% of all U.S. single-family residential and rural property transfers, a record high. And with trillions of dollars expected to pass from older generations to their heirs over the coming decades, real estate will likely play a meaningful role in the “great wealth transfer.”
For many families, that means eventually facing a deceptively simple question: What should we do with the house?
Before deciding whether to sell it, rent it or keep it, it helps to treat the property like any other major asset and run the numbers.
Start with the home’s tax basis
Under current federal tax rules, an inherited home generally receives a new cost basis based on its fair market value at the owner’s death. That can make a significant difference when the property is eventually sold.
Suppose your parent bought a home decades ago for $100,000 and it is worth $500,000 when you inherit it. If you later sell it for $525,000, the taxable appreciation may be much closer to $25,000 than $425,000.
That makes establishing and documenting the property's date-of-death value an important early step.
Figure out what it costs to keep
A paid-off house is not a cost-free house. Property taxes, insurance, utilities, maintenance and repairs continue after the owner dies.
Imagine a $500,000 property requiring $6,000 a year in property taxes and insurance, $3,000 in utilities and basic upkeep, and another $6,000 annually set aside for maintenance and larger repairs. That's roughly $15,000 a year simply to hold the property, about 3% of its value.
And those costs matter whether you live in the house or leave it vacant.
If you rent it, calculate the net return
This is where the math can be misleading.
Suppose someone tells you the house could rent for $3,000 per month. That's $36,000 a year in gross rental income, which sounds attractive.
But that isn't your return.
Consider an illustrative year:
- Gross rent: $36,000
- Property taxes and insurance: -$6,000
- Maintenance and repair reserve: -$4,000
- Vacancy allowance: -$2,000
- Property management and miscellaneous costs: -$5,000
- Estimated net income: $19,000
On a $500,000 property, that's a cash yield of roughly 3.8% before income taxes and without accounting for future appreciation or depreciation deductions.
Those assumptions will vary substantially by property and location, but that's precisely the point. “It rents for $3,000 a month” isn't enough information to decide whether you have a good investment.
Then compare it with selling
Finally, consider what else the property's value could accomplish.
Selling could turn a concentrated, illiquid real-estate asset into money that could be diversified, used to reduce debt, supplement retirement savings or fund other financial goals.
One useful thought experiment is:
If you had inherited $500,000 in cash instead of a $500,000 house, would you use the entire $500,000 to buy this particular property today?
If the answer is no, it's worth understanding why.
There may be perfectly good personal reasons to keep a family home, and not every decision needs to maximize financial return. But the financial tradeoffs should still be understood.
At Hanover Advisors, we help families evaluate decisions like these in the context of their entire financial picture—taxes, cash flow, investments, retirement and estate planning—so that an inherited asset becomes part of a plan rather than a decision made in isolation.