Introduction Recap
You just inherited a property. This can be a valuable asset that can provide you with income, equity, or a place to live. On the other hand, it can also come with a lot of responsibilities, expenses, and emotional baggage. Whether you inherit a property from a relative or a friend, you need to be aware of the legal and financial implications of your inheritance.
How to Decide Whether to Keep, Sell, or Rent the Property
One of the most difficult decisions you will have to make when you inherit a property is whether to keep, sell, or rent the property. This decision will depend on your personal and financial goals, as well as the pros and cons of each option.
If you decide to keep the property, you will have to maintain it, pay for its upkeep, and deal with any issues that may arise. You will also have to pay property taxes, insurance, and possibly mortgage payments on the property. However, you will also benefit from having a place to live, a source of equity, or a potential inheritance for your heirs. You will also have the option to sell or rent the property in the future if your circumstances change.
If you decide to sell the property, you will have to prepare it for sale, hire a real estate agent, and deal with the closing process. You will also have to pay commissions, fees, and taxes on the sale of the property. However, you will also benefit from having a lump sum of cash that you can use for other purposes, such as paying off debts, investing, or buying another property. You will also avoid the hassle and expense of owning and managing the property.
If you decide to rent the property, you will have to find and screen tenants, collect rent, and deal with any repairs or complaints. You will also have to pay property taxes, insurance, and possibly mortgage payments on the property. However, you will also benefit from having a steady source of income that can cover your expenses and generate a profit. You will also retain the ownership and appreciation of the property and have the option to sell or occupy the property in the future if your circumstances change.
Before you make your decision, you should weigh the pros and cons of each option, and consider your financial situation, your lifestyle, your goals, and your emotional attachment to the property. You should also consult with a financial planner, a tax advisor, and a real estate agent, who can help you evaluate your options and advise you on the best course of action.
How to Avoid Probate at The Time of Your Death
One way to avoid probate when you inherit a property is to transfer it to a revocable living trust. A revocable living trust is a legal entity that holds your assets and allows you to manage them during your lifetime and distribute them after your death according to your wishes. Unlike a will, a trust does not have to go through probate, which can save you time, money, and hassle.
To transfer a property to a revocable living trust, you need to create a trust document that names yourself as the trustee and the beneficiary of the trust and specifies who will inherit the property after your death. You also need to prepare a deed that transfers the title of the property from yourself to the trust. You need to sign the deed in front of a notary public and record it with the county recorder’s office where the property is located. You may also have to pay a transfer tax or fee depending on your jurisdiction.
By transferring the property to a revocable living trust, you retain control over the property and can use it, sell it, or modify the trust as you wish. You also avoid the costs and delays of probate and ensure that the property passes to your heirs quickly and privately. However, you still have to pay property taxes, insurance, and maintenance expenses on the property, and you may lose some tax benefits or asset protection that you would have if you owned the property outright. You also have to keep the trust document updated and follow the rules and regulations of the trust. Therefore, before transferring a property to a revocable living trust, you should consult with a lawyer and a financial advisor to weigh the pros and cons and determine if it is the best option for you.
How to Reduce Liability on The Rental Property by Creating an LLC
One way to reduce liability on a rental property is to create a limited liability company (LLC) and transfer the property to the LLC. An LLC is a business entity that combines the flexibility and tax benefits of a partnership with the limited liability of a corporation. By creating an LLC, you can protect your personal assets from the debts and lawsuits of the rental property, since only the LLC’s assets are at risk. You can also enjoy tax advantages, such as pass-through taxation, depreciation deductions, and lower self-employment taxes. Moreover, you can have more control over the management and operation of the property and avoid probate and estate taxes when you transfer the property to your heirs.
To create an LLC for your rental property, you need to follow these steps:
– Choose a name for your LLC that complies with the state laws and regulations and check its availability with the Secretary of State’s office.
– File the articles of organization with the Secretary of State’s office and pay the filing fee. The articles of organization are the basic documents that establish the existence and structure of the LLC.
– Obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). The EIN is a unique identification number that the IRS assigns to your LLC for tax purposes.
– Create an operating agreement that outlines the rules and responsibilities of the LLC and its members. The operating agreement is a legal document that governs the internal affairs of the LLC and defines the rights and duties of the members.
– Open a separate bank account for your LLC and keep accurate records of the LLC’s income and expenses. Do not combine your personal and LLC funds, as this could jeopardize your limited liability protection.
– Transfer the title of the rental property from yourself to the LLC by preparing and recording a deed. You may have to pay a transfer tax or fee depending on your jurisdiction.
– Obtain adequate insurance coverage for your rental property and the LLC. Make sure that the LLC is named as the insured party on the policy, and that the policy covers the potential risks and liabilities of the rental property.
– Comply with the state and local laws and regulations that apply to your rental property and the LLC, such as paying taxes, filing annual reports, renewing licenses, and maintaining safety standards. Failure to do so could result in fines, penalties, or dissolution of the LLC.
By creating an LLC for your rental property, you can enjoy the benefits of limited liability, tax efficiency, and estate planning. However, there are costs and complexities involved in forming and maintaining an LLC, such as filing fees, legal fees, accounting fees, and administrative tasks. Therefore, you should consult with an experienced attorney.
Conclusion
Inheriting a property can be a complex and challenging situation that requires careful planning and decision-making. However, it can also be a rewarding and fulfilling experience, that can provide you with many benefits and opportunities. For assistance in reviewing a lease or rental agreement, contact the Legacy Counsellors Title & Escrow team at 413-527-0517 or email at info@legacycounsellors.com.