Inheriting a House Is More Expensive Than People Think

Most homeowners plan to leave those houses to their heirs, which sounds nice-while losing a close relative is painful, inheriting a house means you can get onto the home-ownership ladder at a low cost, at least theoretically. When our mother passed away, for example, my brother and I inherited our childhood home. Since my brother didn't own a home at the time, we arranged for him to take the property, where he's lived happily for years now.

But inheriting a house isn't just a free house-there are a lot of costs potentially associated with the property, depending on a lot of factors. You need to perform due diligence to ensure that inheriting that property isn't going to be more of a financial millstone around your neck than a boon.

Mortgage

The most obvious thing to check is whether the home still has a mortgage. Even though the person who took out the mortgage is no longer with us, the mortgage still has to be paid, one way or another, and if you inherit the property you also inherit the mortgage. So the first thing to check is whether the person who left you the house took out additional mortgages or lines of credit using the home as collateral-just because the house was at one time all paid off doesn't mean financial necessity didn't drive the former owners to take out new loans on the place, and you need to know what you're on the hook for.

This gets more complicated if there's a reverse mortgage involved-there's usually a pretty tight deadline for you to either pay back the loan or sell the house (and some restrictions on how low an offer you can accept on the place). My brother had to pay back a small amount of a reverse mortgage our mother had taken out on the house shortly before her death.

So your first order of business is to check for outstanding mortgages and contact the lenders involved to make arrangements-and figure out the monthly bill you've just inherited. You can usually negotiate some leeway with the lenders, especially if you plan to sell the place, so it's worth having some conversations to avoid paying unnecessary interest.

Taxes and liens

The next thing you have to think about when inheriting a house is the tax burden. Even if there's no mortgage due, you don't get to live in the house for free. If you plan to keep the house, you should immediately investigate:

• Estate taxes: Both the IRS and your state will tax the fair market value of the estate-including the home's value-if it exceeds a certain threshold. The state of Maryland will also hit you with an inheritance tax.

• Property taxes: You'll also be responsible for property taxes, which vary wildly between states. Typically these are based on property-value assessments conducted by your local government, and are collected quarterly.

Once you know what kind of tax burden you're taking on, you can look into whether or not there are any liens on the property. Liens are placed against properties when there are claims for unpaid debts-for example, if you hire a contractor to do work on the house and they claim you owe them money, they may place what's known as a mechanical lien" on the property. You can try public websites that search property records (like Property Shark) to see if there are any liens on the house you'll be inheriting, but it's best to pay a little money to a title search company to make certain there are no hidden debts lurking there.

Permits

Next, dig into the home's permit history-especially if renovation work was done. You want to make sure that all that work was properly permitted, and that pulled permits were closed with a proper inspection. Any open permits need to be investigated and closed if necessary, and if you find work done without a permit you'll need to either get a retroactive permit from your local construction office or confirm that one wasn't needed in the first place. Otherwise that lack of a permit can cost you big in several ways-from future denied insurance claims to fines levied by your local authorities.

Maintenance and utilities

Even if the house you've inherited has a clean permit history, no liens, and you're not terrified of the tax implications, you need to consider the upkeep of the house. This can get pretty expensive: close to $20,000 a year on average. And if your new house is old and has been neglected for years, that cost could be significantly higher. If the roof is super old, for instance, you might need to shell out anywhere from $6,700 to $80,000 depending on the size and complexity of the roof. And that's just the roof.

Aside from keeping the place from falling down around you, you also need to consider the cost of the utilities: If it's a big, old drafty house, it's going to be a bear to heat in the winter and a challenge to cool in the summer-and your utility bills will reflect that. When you transfer the utilities to your name, you can look at the billing history to get an idea of how much it's going to cost you to keep the heat, power, and water flowing-but make sure the meters have been checked recently. If the utility has been using estimated costs for years, you might be in for an eye-watering correction.

Miscellaneous costs

Okay, so you're good with the tax bill, you've inspected the house and it's in decent shape, you've estimated the maintenance and utility costs, and there are no liens or open permits. There are still a few more costs to add to the total:

• Appraisal. As part of figuring out estate taxes, you'll probably need to have the house appraised, which typically costs $500. This might come out of the estate itself (and not your pocket), but make sure of that before you assume anything.

• The clean out. If the house is still full of stuff, you're going to have to clean it out, which might be an additional cost if you can't handle it all yourself.