Money Talks News may earn commission or revenue through links in the content below. Our editorial team independently selects all products. Compensation does not influence our recommendations.
Mom’s gone. The house is paid off. And now three grown kids own it together, and they can’t agree on a thing.
Let’s say Diane is 60. Her mother never wrote a will, and the family home passed to Diane and her two brothers. One brother has been living there since he moved in to help Mom. The other wants his third, in cash, now. Diane is stuck in the middle.
It’s a made-up family, but versions of this story play out in real ones every day.
I know this territory: I served as executor of my parents’ estate. I’ve also been a CPA since 1981, and this situation has a tax break, an insurance trap and a legal landmine.
Start with the good news. When you inherit property, your tax basis is generally its fair market value on the date of death, not what Mom paid for it. (1)
Now the bad news. If nobody lives in the house, most homeowners policies have a vacancy clause that limits or excludes coverage after typically 30 to 60 consecutive days. (2)
And when family land is inherited without a will or clear ownership papers, a U.S. Department of Agriculture official warned that “any of the heirs can force a property sale.” (3)
Only 46% of U.S. adults had a will in a 2021 Gallup survey. (4)
Here are five things Diane and her brothers need to sort out.
1. The tax break: the “step-up” can wipe out decades of gains
Because basis is generally reset to the value at death, the decades of appreciation while Mom owned the house typically aren’t taxed to the kids. (1)
Here’s a simple illustration. Say Mom paid $60,000 decades ago, and the house was worth $400,000 when she died. If the siblings sell for $410,000, their combined taxable gain is about $10,000 before selling costs, not $350,000.
That’s why the first call isn’t to a real estate agent. Get a professional appraisal as of the date of death and keep it with your tax records.
2. The brother who lives there: the home-sale break runs on two clocks
The $250,000 home-sale exclusion ($500,000 for a married couple filing jointly) requires that you owned the home and used it as your residence for at least 24 months of the five years before the sale. (5)
Under IRS regulations, those two periods don’t have to overlap, as long as both tests are met within the five years before the sale. (6) So the brother’s time living there with Mom can count toward the residence test. The ownership clock generally starts when he inherited his share.
If he buys out his siblings and later sells, have a tax pro sort out how the exclusion applies to the shares he bought.
3. The insurance trap: an empty house can leave you uncovered
The Insurance Information Institute says many standard policies exclude or limit coverage for theft and vandalism once a home is deemed vacant. (2)
If the house will sit empty while you sort things out or sell it, call the insurer right away, tell them the owner died, and ask exactly what’s covered. You may need a different policy.
While you’re at it, compare prices. Home insurance rates have exploded — and if you haven’t shopped around lately, you’re almost certainly paying too much. Loyalty doesn’t pay; your insurer is counting on you never checking. Fight back with Insurify Home Insurance — starting today.
Insurify is a free marketplace that pulls real quotes from dozens of top insurers side by side — see your rates in minutes. No endless forms, no spam calls, no obligation — just your best rate.
Quick aside — most internet financial advice comes from people who weren’t alive during the last recession. I’ve been writing about money for more than 35 years. Want rock-solid advice? Sign up for the free Money Talks Newsletter. Takes 10 seconds. No fluff. No spam.
4. The landmine: one sibling can force a sale
Family land inherited without a will or clear ownership papers is what the USDA calls heirs’ property, and a USDA official put it bluntly: “any of the heirs can force a property sale.” (3)
It gets worse. “In some cases, predatory investors may obtain a share from one heir for the purpose of forcing the sale of the entire property below market value,” the official said. “When the land is sold below market value, all the heirs lose.” (3)
Some states have adopted the Uniform Partition of Heirs Property Act to add protections. (3) But the cheapest protection is an agreement.
Here’s what I’d tell Diane. Get the appraisal.
Put three options on paper: sell and split, let the brother buy the others out at the appraised value, or keep it with a written deal on who pays the taxes, insurance and repairs. If the brother stays without buying, he should pay rent or cover those costs.
5. Don’t leave your own kids the same mess
In that same 2021 Gallup survey, just over three-quarters of Americans 65 and older said they had a will. (4) That still leaves a lot of families guessing.
A will says who gets the house. A trust can go further and spell out how and when it’s sold, or who can buy whom out.
If you’re putting it off, there are easier ways to start.
Without a plan, courts decide everything, probate drags on for months, and loved ones are left guessing. Shield them with a will, a trust or both — today. A will locks in exactly who gets what — and you can get one in minutes for $199.
A trust goes further, controlling how and when heirs inherit, which you can get starting at just $499.
And if the estate also includes investments and retirement accounts, it’s worth having a professional look at the whole picture.
SmartAsset instantly matches you with up to three fiduciary advisors — legally required to prioritize your interests. Have $100K+ in investments? Get matched free in minutes.
My honest take
Plenty of parents assume “split it three ways” settles everything. It doesn’t. A house isn’t a bank account. Somebody lives in it, somebody pays for it, and somebody has to decide when to sell.
If you inherit one with your siblings, move fast on the appraisal and the insurance, and slow on the arguing. Put the deal in writing.
And if you’re the parent, decide now. Your kids will remember the house. Make sure they don’t remember the fight.
Sources: 1. IRS; 2. Insurance Information Institute; 3. U.S. Department of Agriculture; 4. Gallup; 5. IRS; 6. Electronic Code of Federal Regulations
Add a Comment