Inherited a House in New Jersey When You Already Own One: Keep It, Rent It or Sell It?

When you inherit a house and already own your own home, you have three main choices: sell it, keep it as a second home, or rent it out. The right one depends on what it's worth, what it costs to carry, what work it needs, and how the taxes play out on each path. Before any of that, the estate's attorney confirms who has authority over the house and when it can be sold or transferred.

I'm Dennis Mark Interdonato with The Dennis Mark Group. I help executors and heirs across Monmouth and Ocean County with inherited homes, and the question I hear most from people who already have a house of their own is, "What do we do with this one?" Here's how I help you answer it.

What are your options for an inherited house?

• Sell it. You turn the house into cash, stop paying to carry it, and divide the proceeds if there are other heirs.
• Keep it as a second home. You hold on to the place and its memories, and you pay its taxes, insurance and upkeep alongside your own home's.
• Rent it out. The house pays some or all of its own way, and you take on a landlord's responsibilities.
• Move into it and sell yours. Sometimes the inherited home fits better than the one you have. Then it's your current home that goes on the market.

If there are co-heirs, everyone's goals matter. When one wants to keep it and another wants to sell, read buying out a co-heir's share and whether all heirs have to agree.

What does the house cost you while you decide?

An inherited house keeps costing money every month: property taxes, insurance, utilities, lawn and snow, and any mortgage still on it. A vacant house also needs someone checking on it. Put those numbers on paper next to what the house would sell for or rent for, and the decision usually gets clearer. More on that in protecting a vacant inherited house and what happens to the mortgage when you inherit.

Why does the value on the date of death matter?

For federal taxes, IRS Publication 551 says the basis of inherited property is generally its fair market value on the date of death, or on the alternate valuation date if the estate's representative chooses it. If an estate tax return was required, the value reported there generally becomes your starting basis (IRS Publication 551). That starting value is a big part of what you'd owe on a later sale, so document it now. I can give the estate's accountant my market evaluation, and they'll decide whether a formal appraisal is needed. See the date-of-death value.

Can you use the home sale exclusion on an inherited house?

Only if it becomes your main home and you meet the rules. IRS Publication 523 requires that you owned the home and lived in it as your main home for at least 24 months of the 5 years before the sale to exclude up to $250,000 of gain, or $500,000 if married filing jointly (IRS Publication 523). Since you already own a home, you'd generally be choosing which one counts as your main home, and you can only take the exclusion once in a 2-year period. Your tax professional can run both scenarios.

What has to happen before the house can be transferred or sold?

In New Jersey, the Division of Taxation's Form 0-1 waiver releases the state's inheritance and estate tax lien and permits real estate to be transferred. To receive it, the estate files an inheritance or estate tax return or Form L-9 (or L-9NR) and pays any tax due (NJ Division of Taxation). The estate's attorney handles that and the Surrogate's paperwork. The details are in the NJ inheritance tax waiver for a house.

What does renting an inherited house involve?

• Registration. New Jersey landlords file a certificate of registration, with the municipal clerk for a one-unit rental, and an owner who lives outside the county names someone in the county to accept notices and legal papers (N.J.S.A. 46:8-28).
• The alarm certificate is required before the home is leased (N.J.A.C. 5:70-2.3).
• Income tax. In most cases, rent you receive is included in your gross income (IRS Publication 527).
• Condition. An older house often needs work before it's ready for a tenant, and the work has to be done right.
• The lease. Talk to an attorney about New Jersey's landlord and tenant rules before you sign one, especially if a sale might come later.

How do I help you decide?

1. A real market evaluation, backed by data and my walk-through, so everyone with a say is looking at the same number.
2. A builder's read. I'm a former New Jersey home builder and residential remodeler. I'll tell you what the house needs to sell, to rent, or to live in.
3. Two plans for a sale: as-is, or a few targeted updates first, with what each should bring.
4. The contents. Once the attorney confirms who has authority over them, I can line up an estate sale and a clean-out. I got a guy for everything.
5. Written updates to you and any co-heirs at every step, wherever everyone lives.

Frequently Asked Questions

Is it better to sell or rent an inherited house?

It depends on the numbers and on whether you want to be a landlord. Compare the net from a sale with the full monthly cost of renting it, and run both past your tax professional.

Do I pay capital gains tax if I sell an inherited house right away?

Possibly, but the starting basis is generally the value on the date of death, so if the house sells soon at about that value, the gain may be small. Your tax professional calculates it. See capital gains on an inherited house.

Can I keep the inherited house as a second home?

Yes, once the estate's attorney confirms the transfer. Budget for taxes, insurance, utilities and upkeep on two homes.

Can I move into the inherited house and sell my own?

Yes. Then the plan becomes a sale of your current home, and the timing of both homes matters for taxes. Start with a home value on yours.

This is general information, not legal, tax or lending advice. The estate's attorney and accountant handle the probate, inheritance tax and income tax questions.

About the author

Dennis Mark Interdonato is a REALTOR® and Master CDRE® who leads The Dennis Mark Group at Keller Williams Realty Ocean Living in Point Pleasant, NJ, helping buyers and sellers throughout New Jersey make their next move, with Monmouth and Ocean County as home base. Read more about Dennis Mark.

Keep reading

• How Dennis Mark sells estate and inherited homes and plans around a life event
• Plan it step by step with the free Life Events Guide.
• The Estate & Probate Guide, from Letters to closing
• What is it worth? Start with a free home value.
• If you decide to sell: how to sell an inherited house in New Jersey.
• Have a question this didn't answer? Send it to Dennis Mark and it may become the next article.