Inheriting a home on its own can be a blessing in one’s life, but when that home is also left to a sibling of yours, things can get complicated, emotionally speaking. The emotional strain could also pose issues with financial stress and stress in general, which can take away from the whole experience. Unless it is stated otherwise, inheriting a home with one’s siblings will usually mean that the property is equally distributed, but that is not always the case. Below, we will discuss shared ownership of an inherited home between siblings as well as some other legal ramifications, so you can better understand and be prepared for the process.
Resolving a Conflict with a Partition
For many people, involving the court is a last resort, but it may be necessary if you cannot agree on what to do with the property. A partition suit is what is undergone in this case. It is a lawsuit that asks the judge to order the sale of the home in order to get rid of the co-ownership. The process for this can end up being quite long and complicated.
In a partition suit, a judge will bring in a mediator whose job is to mitigate conflicts between the owners. This will be an extra expense on top of what you are already paying a real estate agent to sell the home, and beyond that, there is a chance you might need an accountant to help divide up any proceeds. This can impact your profits. To sidestep these additional costs, you can attempt to settle these issues on your own through some of the following methods.
Sharing Ownership of the Home
Sharing ownership between one or more people is possible, even though your first thought may be to decide who gets to own the inherited home separately. As long as the details have been negotiated properly, it can be an enjoyable experience.
Tenancy in Common vs Joint Tenancy
If you’ve chosen to share ownership, you’ll need to understand the terms under which the home was left to the heirs, as well as the main differences between a joint tenancy and a tenancy in common. You can change the terms of your ownership to either one of these, so understanding the facts of these structures is important.
When the title is considered tenancy in common, it means that every owner has an interest in the property. This interest can be divided unequally or equally. Even if one person owes more, all owners still have claim to some of it. This means that one person can claim total ownership. Every owner can transfer or sell their share to someone else without the approval of a co-owner, and if the co-owner passes away, their interest will be handed down to their heirs automatically.
Joint tenancy, on the other hand, means that every owner has an equal percentage of interest, and the ownership cannot be handed down to an heir. This is because, in the event of a death, their share automatically is passed down to the surviving co-owner. In a joint tenancy, shares can’t be sold without the approval of all of the co-owners.
Much like tenancy in common, joint tenancy lets you transfer your shares to someone else. Although, when this happens, the person cannot enter the joint tenancy. They are instead a part of a tenancy in common with the other co-owner.
Renting and Splitting Profits
If neither one of the siblings wants to sell the home, renting is an option that could be profitable for all parties. It is even possible for one of the siblings to live in the home with anyone who rents it.
Structuring a Buyout
Many properties are inherited evenly, so you and your sibling will have half-and-half ownership unless it has been stated otherwise elsewhere. If one sibling wants to buy out the other, they would have to finance at least half of the value of the home. The most crucial aspect of this process is having the home appraised. This is known as property valuation, which decides what the home is worth. After the value has been calculated, one sibling can pay the other for their share and then put the deed in their name alone.
Refinancing When Buying Out Other Inheritors
Traditional lenders don’t often offer this kind of refinancing, but you may have luck with a hard money lender. Hard money loans are short term loans given by a non-conventional lender, like a private company or an individual. They accept an asset or property as collateral for the loan. These loans often have a quick approval process that makes them a convenient choice for those who want to move quickly. Much like traditional mortgages, it is important to remember that your property is collateral for the loan, meaning that defaulting on it may mean the lender seizing the home.
Selling and Dividing Profits
If you and your sibling have decided to sell the home, you’ll need a professional appraisal to find out how much it’s worth, which is important when it is time to sell the home and divide up the profits. You’ll also need to figure out who in or out of the family will get the right of first refusal. This is a clause in a contract or lease that lets you complete a transaction with other parties before anyone else is allowed to. It means that a potential buyer has the right to be the first person to put an offer on the table once it is listed. If there is another interested party, the buyer has the choice to buy the property over the other party or to decline it altogether.
Paying Capital Gains Tax
Capital gains tax is a tax that has to be paid when you sell an asset that has grown in value since it was purchased. If you sell your home swiftly enough after you inherit it, you might not need to pay this, since the home’s value likely wouldn’t have changed.
Sharing a Vacation Home
There is a unique set of problems that could come with sharing a vacation home as opposed to a primary residence. Here are a few tips on navigating this situation:
- Consider opening an expense account that will ensure all of the co-owners are equally contributing to improvements, maintenance and renovations.
- Consider creating a governance board that can help streamline the decision-making process and reduce pressure on the siblings.
- Consider hiring a property manager to take care of the stress of the administrative work and upkeep.
A few other general tips include:
- Talk to a lawyer and other relevant professionals before making decisions.
- Make sure you get all of your agreements in writing.
- Talk to friends when you are stressed instead of arguing with your sibling; take time away when you feel emotions running high.
Inherited homes come with plenty of sentimental value, which can invite disagreements and arguments. It’s important to understand the different options you and your sibling have when it comes to co-ownership in order to make the transfer of property a seamless one—and one that can even be enjoyable.