The Pros and Cons of Using Your Home as an Inheritance for Your Heirs | NewRetirement (2024)

A home holds more than just financial value for most people; it becomes filled with fond memories and emotional significance over time. The desire to keep such a home within the family, with the intention of passing it down to your children, is a common goal. However, it is critical to carefully consider both the advantages and disadvantages of retaining the property to ensure that future generations can continue to appreciate it.

Below, we’ve detailed some of these pros and cons, providing a basis for discussions within your family to find common ground on the best course of action.

The Downsides of Leaving Your Home to Your Children

Navigating the inheritance of a family home involves considerations that extend beyond the emotional attachments to the property. While it’s natural to hold onto cherished memories, it’s imperative to acknowledge the potential drawbacks tied to inheriting a home, considering factors such as its liquidity, location-related challenges, ongoing expenses, and family dynamics.

Con: Illiquidity limits options and adds risk

Homes are considered illiquid assets, meaning they can’t be quickly converted to cash, and their value is subject to changes in the real estate market. This lack of liquidity poses a challenge for heirs, especially if the market experiences a downturn when they plan to sell the home.

Unlike stocks or cash, a home isn’t easily divisible or sell-able in parts to provide funds as needed—it’s an all-or-nothing situation. When multiple siblings or family members may be involved, the illiquidity of a home makes dividing the asset more complex. They are faced with the choice of selling the entire property and dividing the proceeds or reaching an agreement for one sibling to buy out the others’ shares.

In a scenario where your children may desire swift action and resolution, the extra complexity associated with inheriting an illiquid asset may become a cause for concern.

Con: Location, location, location!

You might have assumed that everyone eventually dreams of living in Pittsburgh, PA (insert your city here), right? (I say this tongue–in-cheek as a lifelong Pittsburgh resident!) However, this may not necessarily be the case.

If the inherited property is not situated in a location that aligns with your heir’s lifestyle, career, or personal preferences, it can present a disadvantage. This could restrict their options and flexibility, especially if you had hoped they would consider residing in the inherited home.

Even if your children decide to sell, an undesirable location could result in lower demand, leading to extended selling times and accepting lower offer prices. It might also pose a greater challenge if they opt to rent, as renters generally prefer more ideal locations. Higher vacancy rates and lower rental rates could be potential issues in less desirable areas.

NOTE: Thinking of relocating to a more desirable city or state in the future yourself? The NewRetirement Planner allows you to model a relocation to another state, perhaps one without any state income taxes for instance, to determine the impact on your retirement plan.

Con: The unexpected burden of ongoing expenses

Many of you have likely experienced the fact that home ownership can be quite expensive over time. Expenses such as mortgage payments, utilities, home insurance, property taxes, maintenance, repairs, and more can collectively represent a significant monthly financial commitment that your child or children may not have had to manage previously.

Even if the home is fully paid off without any mortgage, these other ongoing expenses can add up quickly. Additionally, if your children lack a strong financial foundation, including an emergency fund or substantial cash reserves, residing in the property could potentially strain their financial picture.

To illustrate, let’s consider an example: You reside in Ft. Lauderdale, Florida, and over several decades, the value of your home has significantly appreciated to $800,000, and you’ve completely paid off your mortgage. Your only child lives in the Northeast, where the weather tends to be (much) colder throughout the year. While you may envision them happily inheriting a home in a warm, sunny climate so they can ultimately make it their family vacation home, a detailed examination of the costs reveals the following annual expenses:

• Property Taxes: $9,600
• Utilities: $5,400
• Home Insurance: $2,500
• Maintenance & Repairs: $8,000

Total Estimated Annual Costs: $25,500

Upon realizing the substantial cost of upkeep, amounting to an additional $2,125 per month in estimated expenses, they might conclude that it’s more financially prudent to enjoy multiple visits to Florida throughout the year, revisiting their favorite childhood spots, rather than taking on the responsibilities of maintaining the inherited home.

If you were utilizing the NewRetirement Planner’s Detailed Budgeter feature for PlannerPlus subscribers, you would have been prepared to outline these ongoing costs as part of the conversation with your family regarding leaving the home as an inheritance.

Although inheriting the family home may sound like a heartwarming prospect, it can stir up conflicts among siblings and family members. Differences in opinions about how to use, sell, or manage the property can strain relationships. Additionally, many of these differing opinions carry significant emotional weight, influenced by each sibling’s unique experiences within the family home throughout the years.

When multiple siblings inherit a home together, key questions to address may include:

• If the decision is to keep the home, there’s a need to establish a fair method for sharing costs. This becomes especially complex when siblings have differing financial means, live in different areas, and lead distinct lifestyles.
• Distributing responsibilities, such as managing maintenance issues, repairs, and other time commitments, becomes a challenge when siblings are scattered across different locations.
• In the case of major renovations, determining each sibling’s contribution is essential for a smooth collaboration.
• When considering selling the home, timing becomes a critical factor. The emotional readiness of each sibling may vary, leading to potential conflicts on when is the best time to sell.
• Opting to rent the home raises questions about which siblings are willing to take on the role of landlords and understand the time commitment associated with this responsibility.

Without multiple family conversions or a clear written agreement detailing how the shared home will be used and allocated, selling the home might be the best solution to maintain harmony among siblings and preserve family relationships.

The Upsides of Inheriting the Family Home

The news of inheriting your home shouldn’t be entirely daunting for your children. There are several advantages to take into account as well.

Pro: Preserving family memories

Leaving the family home to your children allows them to continue embracing their happy memories and feelings over time in the home. Your kids probably have tons of holiday celebrations and Sunday dinners connected to that house. They might hope their own grandchildren will play there someday too.

Your children may also have memories of a departed family member within the home, finding solace in keeping it during moments of grief over the years. The thought of strangers living there may be too much to bear.

The emotional connection can far outweigh any practical reasons for selling the home and keeping the property can honor the past while still making new memories for the future.

For a lot of people, a home in the family for generations is priceless. No dollar value can capture what it really means.

Pro: Accelerating financial goals for your children

Perhaps your child has always dreamed of owning a home, but life’s whirlwind of bills and responsibilities made saving for a down payment a bit of a challenge. Now, picture this: inheriting a home means they can skip the whole down payment hustle and wave goodbye to those monthly mortgage worries. Allowing your child to reach their financial goals without all the usual roadblocks is a win-win for everyone involved.

Or, let’s say your home is in a great location with beautiful weather and your children always had a goal to purchase a vacation home in the area. After examining the ongoing costs, it becomes apparent to them that the inherited property could seamlessly transition into the designated family vacation home.

If the house they inherit meets their needs, it might be a cost-effective way of accomplishing their existing objectives.

Pro: Potential for future appreciation or rental income

Even if you leave your home to your children as an inheritance, ultimately, they still likely have the final say regarding what to do with the home. This can include selling or renting out the property, which can come with its own advantages.

Pro: Selling the property and capital gains tax

There can be tax benefits associated with inheriting real estate.

Typically, when adult children inherit the family home from a parent, they often benefit from a “step-up” in basis for tax purposes. This adjusted cost basis is generally determined as the market value of the property on the date of the parent’s death, though there is an option for the estate to choose an alternate valuation date (usually six months after the death).

An example:

• You originally bought your home for $300,000.
• The home is worth $700,000 when you pass. This becomes your child’s cost basis, or “starting point”, for tax purposes if they were to sell the home in the future.
• If your child decides to sell the home a year later when the home is worth $750,000, they would only pay taxes on the $50,000 difference between their cost basis of $700,000 and the $750,000 sales price.

As most inherited homes have gone up in value over time, this step-up in basis can reduce the amount of capital gains tax owed if your child sells the property in the future.

NOTE: Make use of NewRetirement Planner’s One-Time Expenses section to ensure you are accounting for one-time costs when selling a home in the future, like potential capital gains taxes and selling costs.

Pro: Keeping it in the family by renting it out

Additionally, inheriting real estate could give your children long-term financial stability if they want to become landlords. Renting out the inherited property can provide ongoing income instead of selling it or just using it themselves.

The local rental market will play an important role in this decision. For example, if the home is in a popular vacation area with strong rental demand, the income potential could be significant.

If your children don’t have time to manage the property, they’d need to budget for a rental management company. In that case, they should calculate if the rental income is enough to pay those fees and still be cash flow positive.

Another idea is to use the home part-time personally and rent it out the rest of the year. This dual use can help offset ownership costs while still keeping the property in the family.

Keep the Conversations Going

As you can see, exploring the possibility of leaving your home as an inheritance for your children raises numerous discussion points.

Ensuring open conversations with your entire family, free of surprises, is key to making the best decision for both you and your children regarding the future of your family home.

For financial decisions, both you and your heirs can run scenarios in the NewRetirement Planner to help you make more informed decisions.