If you’ve just inherited land, you may have some tough decisions to make in a short amount of time.
After inheriting land from the death of a family member or friend, you may be going through all sorts of emotions and questions. For many, it’s hard to know where to begin. From sentimental connections to family property, to ownership transfer, to tax considerations, to long-term investment decisions (hold, lease, or sell?), there’s plenty to sort through.
We’re here to help you navigate with this quick land inheritance 101.
As Matthew Kreitzer, attorney at Booth & McCarthy states, “there are probate rules to consider, and issues related to the formation of the will.” Probate court oversees the transfer of belongings from a person at the time of their death. If a will is appropriately set up for the deceased before time of death, the court and its executor can transfer ownership of the property under the terms of the will.
If there is not an adequate will in place at the time of the benefactor’s death, the land inheritance decision enters “administration.” The specifics during and following administration may vary considerably based on specifics related to the benefactors and state regulation.
Inheritance laws vary from state to state, but in the states where a community property system is followed (Alaska, Arizona, Texas, Nevada, New Mexico, Idaho, Wisconsin, Washington, California, and Louisiana), the surviving spouse gets half of the property acquired during marriage, unless there exists a written document against it. Every other state in the United States follows common law, according to which the surviving spouse is given the right to choose whether they want to claim a third or half of the inherited property.
Drew Vaughn, the owner of NuVorce LLC and a professor of Advanced Domestic Relations Law at Loyola University Chicago School of Law, talks about inheriting property after divorce and states that “inherited land is a non-marital property, which means that it will be given to the spouse who inherited it in the divorce”. He further states that “if the property is titled jointly with the spouse when inherited, the property can be deemed marital property and divided between the spouses in the divorce”.
“Bottom line, how that inherited land is titled can mean the difference between getting 100% of what you inherited or getting 40% of what you inherited.”
In the case of siblings or other family members inheriting the property, dividing it actually comes down to an agreement among those parties. Unfortunately, some of them may resort to a lawsuit if they feel the inherited property was not divided equally, but this is the case in extreme situations only. Ideally, an agreement among siblings or other parties can make everyone satisfied, as some may want to sell their part of the property and others may not want their share at all.
Whether the beneficiary (i.e. the person/organization that has inherited the land) decides to hold on to the inherited property, lease, or sell it, there are still some costs that may come with the property.
Firstly, you may need to pay estate taxes (sometimes referred to as “death taxes”) for the inherited land. This is based on the value of the full estate (an estate is defined as an accounting of everything one owns or has interest in), made up of all taxable assets including the inherited property. This requires an estate tax return, and consulting an experienced tax attorney is highly recommended in this case. If the total value of the estate is under the exemption threshold (currently $5.4 million in 2016), you may be lucky and estate taxes may not be assessed at all.
Some states also issue an inheritance tax to the beneficiary, so you would be liable for this charge in addition to the estate tax. Usually, there are no income taxes associated with the transfer.
All property taxes, mortgages, HOA fees, or liens for the property are owed as well. Prior obligations are transferred to you, and future fees will accrue over time. Depending on the amount of debt, taxes, or fees payable, you may decide you are better off selling the land or even letting it go into foreclosure. There may also be maintenance costs associated with owning the property (i.e. cutting the grass and maintaining the lawn per local regulation, for example).
If the property is later sold at a higher value, a capital gains tax may be owed. The tax is only on the net gain between the assessed value of the land at time of the benefactor’s death, and the final net price the land is later sold for.
Consider all of these potential costs when evaluating your decision of holding, leasing, or selling your lot, and be careful not to let sentimental value factor in too much to your financial and real estate decisions. Certain properties may be a blessing, holding significant long-term value or buildable area to erect your new home or commercial interest. Other properties may have little value or exorbitant costs.
If the beneficiary values privacy in property ownership (i.e. in the case of business leaders, celebrities, law enforcement, or anyone who values anonymity) or simply wants to own the property as part of a joint group (e.g. for a group of siblings, for example), a land trust may be the best solution.
John M. Coombe, Vice President of Fiduciary Business Services at First American Trust, FSB, and Elizabeth A. “Libby” Markworth, Vice President and Relationship Manager of Fiduciary Business Services at First American Trust, FSB, say that “owning real estate through a land trust is a time-tested way of protecting your privacy when it comes to your home, your business and your family”.
A land trust offers anonymity, since it is an agreement between a trustee and the beneficiary, where the trustee holds all the legal rights to the property, while the beneficiary holds the ownership, possession and management rights.
In order for you to be able to sell a property that you inherited, you would need to be authorized as the seller through a Deed in your name, and/or you would need to be the Trustee of a Trust or an Executor of an Estate. Do one of these apply to you? If not, I found these articles that may be helpful to you:
In order for you to be able to sell the property it may have to go through the Probate process (depending on the value of the estate). I would suggest contacting an estate attorney to determine what steps you need to take to get the title transferred into your name. My understanding is there are expedited probates when the estate’s value is small and below a certain dollar amount that only take 1-2 months. You can check with the county court’s Probate Dept. and ask them what the criteria is for a “small estate probate” or “expedited probate” and they can likely send you the required forms.
In summary, while inheriting land means you now claim ownership in a new asset, there are many important considerations that come along with it. From estate taxes, to legalities, ownership costs, and more, there is plenty to navigate. Make sure you call on an experienced tax attorney or estate attorney for trickier situations, and be mindful of the ramifications of your property decisions.
We offer a range of land lots for sale across the U.S., often listed at remarkable below-market prices from new beneficiaries.