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Richard
Richard, Lawyer
Category: Real Estate Law
Satisfied Customers: 54001
Experience:  32 years of experience as lawyer in Texas. I'm also a Real Estate developer.
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My brother and I Inherited a property, with no mortgage and

Customer Question

My brother and I Inherited a property, with no mortgage and the taxes are paid for this year. We have no experience in renting, but think we would like to try it to make some money. Or is it easier to just fix it up and try and sell it and split it fifty fifty?
Submitted: 1 year ago.
Category: Real Estate Law
Expert:  Richard replied 1 year ago.

Good afternoon. My name is ***** ***** I look forward to helping you.

If you have no experience in renting, I would suggest you fix it up and sell it. Renting a property tends to negatively impact its value after a bit because renters simply don't care for a house like owners do. And, you never know when an unexpected expense may come up. If you do decide to rent it, I would suggest you contribute it to a limited liability company so that you and your brother protect your personal assets from any liability that might arise. Being a landlord can be profitable, but you also have to be prepared to deal with tenant problems whenever they occur....especially emergency plumbing, HVAC, or related issues that put a tenant's health and safety in peril.

Thank you so much for allowing me to help you with your questions. I have done my best to provide information which fully addresses your question. If you have any follow up questions, please ask! If I have fully answered your question(s) to your satisfaction, I would appreciate you rating my service as OK, Good or Excellent (hopefully Good or Excellent). I thank you in advance for taking the time to provide me a positive rating!

Customer: replied 1 year ago.
Are their certain tax codes that we need to worry about if renting ex capital gains tax I don't understand what that is
Expert:  Richard replied 1 year ago.

Thanks for following up. You will need to report the operations on Schedule E of your tax returns. And, you will be required to depreciate the improvements (not the land) over time. The rent will be income, and then you can deduct the expenses of the property...insurance, HOA fees, repairs and maintenance, property taxes, etc. IRS Publication 527 sets forth the guidelines for you. You can find this Publication at the following link: https://www.irs.gov/pub/irs-pdf/p527.pdf

Expert:  Richard replied 1 year ago.

Your depreciation reduces your basis in the property (which basis was adjusted when you inherited to its fair market value). So, as your basis decreases, when you go to sell the property, your capital gain will be increased on sale.

Customer: replied 1 year ago.
What about insurance for the home if we do rent it should we have insurance
Expert:  Richard replied 1 year ago.

Yes, you will want your own liability policy as a landlord and then you will want to require your tenant to carry renter's insurance in case the tenant or one of the tenant's invitees were to cause damage to the house or take action resulting in injury.

Customer: replied 1 year ago.
What do you mean by decreased basis?
Expert:  Richard replied 1 year ago.

When you sell the property, your gain is the sale price in excess of the basis. When you inherit property, the fair market value becomes the basis rather than the original purchase price. So, you were to sell the property now, you would likely have no gain because you would sell it for the fair market value and since the basis is also the fair market value, there would be no gain and thus no tax. But, when you rent it, the improvements must be depreciated. So, each year, the basis is reduced by the amount of the depreciation taken. So, when you sell it, you will have gain; but in the meantime, the depreciation deductions are giving you a current tax benefit.

Customer: replied 1 year ago.
The house is paid off... I don't know what the fair market value is (is the market value the appraised price) so suppose it is 100k... If we sell it for 150k.. Is that how much we would make?
Expert:  Richard replied 1 year ago.

If you sell it close to the time of death, the price at which you sell the property is going to be the fair market value. It's only appreciation after death that would be subject to tax. If it did appreciate after death by $50,000, then you would only have gain of $50,000.

Customer: replied 1 year ago.
we couldn't sell for a price considering updates, location, etc. it would have to for what the city determines?
Expert:  Richard replied 1 year ago.

No, the city's tax appraisal is not relevant. It's the true fair market value of the property that is determinative. Tax appraisals rarely reflect fair market value.

Customer: replied 1 year ago.
Who determines fair market value?
Expert:  Richard replied 1 year ago.

If you sell it close to the time of the date of death, the sale price will determine fair market value. Otherwise, you can have it appraised by a real estate appraiser or broker in the area

Customer: replied 1 year ago.
What's too close to the death?
Expert:  Richard replied 1 year ago.

Any sale within a year would allow you to treat the sale price as the value as of the the date of death with the result being no gain.

Customer: replied 1 year ago.
How does the sale determine the fair market value? Sorry I'm not familiar with these concepts.
Expert:  Richard replied 1 year ago.

The definition of fair market value is the price at which the property changes hands between a willing buyer and a willing seller. So, if you are to agree with a buyer to buy the property, the sale price, by definition, would be the fair market value.

Customer: replied 1 year ago.
let me see if I get it. If houses around the area in similar condition and similar properties, i.e. 2 bed/1 bath are selling for an average of 100k. Then that's the fair market value as most buyers are willing to pay that. The appraiser may say it's more or less. But since that's the fair market value, we would get 100k... And that would still be a gain to us.
Expert:  Richard replied 1 year ago.

No. The basis would be $100k and your sale price would be $100k. $100k minus $100k would be zero. Thus you would have zero gain and thus no tax on the sale.

Customer: replied 1 year ago.
basically we would make 100k but we would not pay taxes, unless if we sold for more than the fair market value?
Expert:  Richard replied 1 year ago.

Yes, that is correct.

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