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Inherited House

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billd
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Inherited House  Reply with quote  

Hello:

For the past several years I have been a live in caregiver to my mother. She recently passed away and I inherited her house which has been appraised at $1 million.

I am 45 years old, single and childless. Now that my mother has passed, I will probably relocate, but I am uncertain where so I would like to rent for the next few years as I decide on a new home base.

I'm not sure what to do with this house. My preference is to sell the house and place the proceeds into an investment account as I figure out my next steps, but I'm concerned about destroying my preferential tax treatment. I don't really want to go through the hassle of renting this house out if I can avoid it. What should I do?

I should mention that I'm debt free and I do not own a house besides the one I've inherited.
Post Mon Jun 30, 2014 8:07 pm
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oldguy
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No problem, the preferential tax treatment on the appraised inherited amount is locked. Any taxes due will be strictly on your future profits.

1. Stocks. If you sell it now, there is no tax. If you invest the money and it grows (say the $1M of stocks grows to $1.1M) you will owe tax on only the $100,000 profit when you sell the stocks.

2. Live in it. If you keep it and live in it as your primary residence, there will be no tax on the gain when you sell it later up to $250,000 profit.

3. Rental. If you keep it and rent it out, the rental income will be taxed as ordinary income, and any appreciation will be taxed as capital gain.

I'm a landlord - my rentals are about 1100 to 1200 sq feet, 3bd2ba. Young couples need to rent while they are finding their 'permanent' job/location - or they need to rent while they are saving up a down payment to buy a house. They make up most of the individual house market - and they need small houses/low rent to meet their goals. It is difficult to keep a $million house rented.

In general, the generic stock market index doubles every 7 or 8 years over a LONG TERM. Ie, don't count on it for 7 yrs or even for 15 yrs. But over 25 yrs, the longterm average is fairly reliable. So you have an opportunity to go from $1m to $2m, $2m to $4m, $4m to $8m in 25 years. Here is a useful site for historical US Market returns.

http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
Post Mon Jun 30, 2014 10:42 pm
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billd
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Thanks. That helps. Decisions, decisions.
Post Tue Jul 01, 2014 12:02 am
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Wino
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quote:
I'm not sure what to do with this house. My preference is to sell the house and place the proceeds into an investment account

This is undoubtedly your best choice. I would suggest you look in to Vanguard or Fidelity (or both). These sites have easy-to-set-up accounts where you can invest your money. As you have $1M and the stock market is at an all-time high, you should probably spread your money into probably 10 different mutual funds. Some will gain. Some will lose. Some will grow slowly. Some may take off. You don't know what any of them will do.

If you go with the S&P 500, you're betting that the US economy will continue to grow. As oldguy said, over a 25 year period (when you're 70), you can pretty much expect your investment to be between $3.5M and $5M, but it may be more or less. No one knows what's going to happen going forward.

I thought about a year ago that the stock market couldn't maintain its gains, and I was right, but also very, very wrong. It didn't maintain, it grew. I figured it would dip if not crash like in 2008. Instead, it is up about 20% since then. Will it keep going up? Maybe. Will it crash? Maybe. Will it just sit there? Maybe.

No one knows. The thing you should NOT do is let the money sit in a money market or CD. These are guaranteed to lose value to inflation over time, as they are pegged to about inflation minus 2% on average. You will be losing about $20K per year in spending ability on the $1M in the money market account. The previous having been said, a money market within one of the brokerages I suggested (Vanguard or Fidelity) is a good place to park your money while you decide what to do with it.

I would suggest reading more, asking more questions, and researching the markets more before you do anything with the money. There's no rush. The market will still be there next week, next month, and next year.
Post Tue Jul 01, 2014 3:57 pm
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