inherited property; rent, sell, split with siblings, etc...

[ioski]

What is the name of your state? California

My mother passed away recently and my father passed away many years prior.
She stilled lived in the house where my sister, brother, and I grew up.
It has been paid off for many years. The three siblings are splitting any assets three ways.
Neither my brother nor I are married. My sister is married with 2 kids.

The issue is that my sister and her husband are in favor of renting the house out.
I am not, and would like to be bought out if they decide to do this.

My sister requests that any action wait until her husband closes a commercial real estate
purchase for his business which hopefully will be done in 3 months. She said they should
be able to buy me out provided her and my brother work out an equity swap. Technically,
my sister owns half of my brother's house in which he lives. She wants her money out of
their co-owned house my brother lives in and off the title.

In addition however, she has brought up the idea of owner financing for my part of my mom's house. The house is in fair to good condition. It was in a nice area (it is 40 years old or so), but the street, once a dead end and quiet, is now a major thru way and the neighborhood has gone somewhat downhill. This is one reason why I am not in favor of making it a rental, want to sell, and not inclined to do a owner-finance.

One reason my sister and her husband seem more inclined to rent seems to be taxes. They mention that often in discussions, but I thought that any profits from the sale of my mom's is not taxable since it is inherited property and the split profits would be well under 250K. Because the market isn't so hot right now and the area; I had thought that we might even manage a capitol loss when comparing the fair market value (when my mom passed away) with the eventual selling price. They also mention fixing it up and selling when the market is better to make more money. I figure that may create a larger tax problem. Even selling it now, "for a loss" would really not be a loss since no one owes anything on the house and selling it would give us money we didn't have before and would likely be free of taxes.

For my part, I would like to take a fair chunk of any inherited funds and pay off debt and pay down mortgage.

Does this sound reasonable or am I passing up any tax advantage or possible good rental income, or loan (owner-finance) income? I am leary of renting and of owner financing it for my sister.What is the name of your state?

 

[divgradcurl]

One reason my sister and her husband seem more inclined to rent seems to be taxes. They mention that often in discussions, but I thought that any profits from the sale of my mom's is not taxable since it is inherited property and the split profits would be well under 250K.

You only get the $250K deduction if you live in the house as your primary residence for 2 of the 5 years preceding the sale of the house. You will pay capital gains taxes on the full amount of the sale, less the basis (the fair market value of the house the day your mom died), unless you live in the house as your primary residence for at least 2 years before selling.

They also mention fixing it up and selling when the market is better to make more money. I figure that may create a larger tax problem.

Depends on what you consider a "problem." If it sells for more, yeah, your tax bill will be higher -- but capital gains is at a much lower rate than ordinary income, so you'll still end up ahead if you sell for more.

Does this sound reasonable or am I passing up any tax advantage or possible good rental income, or loan (owner-finance) income? I am leary of renting and of owner financing it for my sister.What is the name of your state?

If you rent the house, remember that rental income is just that -- income -- and in most cases is taxed as ordinary income. A "loan" isn't income -- only the interest on the loan is income to you -- so an owner finance doesn't create any taxable income unless there is interest, and then only the interest is taxable income. Money that goes to paying the principle is neither tax deductible to the payer, nor taxable to the payee.

But here's the thing -- you can't force anyone to buy you out. You either need to work something out with your siblings -- whether it's a buyout, an owner-financed buyout, or hanging on to the property as a rental property and selling later -- or file a lawsuit to partition the property, which will likely be expensive, time consuming and divisive to family harmony. It's up to you which way to go. You might want to sit down with a tax pro to see what works out best for you from a tax perspective, and you'll almost certainly need to sit down with a lawyer if you decide to go the partition route. But your best bet is to simply try and work something out with your siblings.

 

[colourfastt]

If you rent the house, remember that rental income is just that -- income -- and in most cases is taxed as ordinary income. A "loan" isn't income -- only the interest on the loan is income to you -- so an owner finance doesn't create any taxable income unless there is interest, and then only the interest is taxable income. Money that goes to paying the principle is neither tax deductible to the payer, nor taxable to the payee.

But here's the thing -- you can't force anyone to buy you out. You either need to work something out with your siblings -- whether it's a buyout, an owner-financed buyout, or hanging on to the property as a rental property and selling later -- or file a lawsuit to partition the property, which will likely be expensive, time consuming and divisive to family harmony. It's up to you which way to go. You might want to sit down with a tax pro to see what works out best for you from a tax perspective, and you'll almost certainly need to sit down with a lawyer if you decide to go the partition route. But your best bet is to simply try and work something out with your siblings.

As far as the tax on an owner financed sale: the interest is taxable as stated, but some of the principal is taxed also. It's a percentage figure based on the original cost basis and the sale price.

 

[nextwife]

Before you do anything, complete probate in accordance with your states probate laws . If no will, then it will be intestate probate laws that apply. Neither you nor your sibs now "own" the proberty and will not until probate is completed.

As to use of your potential respective shares, if you want out and siblings want to keep it, they can buy out your share based upon a market appraisal. Then they are free to rent to their hearts contect. You have the right to want it sold, or that they get financing for the share. You are not required to sit on the equity for years of owner financing. You can file partition, if desired, once the transfer from the estate is completed, if you cannot come to an agreement.

I'd suggest running a title report. For all you know, mom never completed transfer of dad's share.