Take a house as advance inheritance or not

Real Estate
1

Dear all

So far I was a silent reader of the forum and learning much from you all. So far I invested mainly in ETF, some stock and a little into Crypto, while working a regular 9-5 job.

Now I wonder if you can help me with my decision: to take or not to take the house.

My parents will move out of their house (terraced house, 5.5 rooms) located in a village. My and my siblings have the possible to take over the house if we want. As my siblings are not interested in the house, its on my to decide if I take it. If non of us will take it, my parents will sell it (approx 1 Mio.)

At the moment I don’t see myself living in that house. So I am about to decide if its is worth taking the house as a rental property. The conclusion of my research so far is, that in general terraced houses are not really attractive as rental properties, as the profit is low.

For my situation an important point is, that I could take over the house without equity capital e.g. “for free” as advance inheritance. My very rough estimate concluded, that I could probably expect an annual profit of roughly 10k per year (after taxes, provision for renovation, etc).

My general opinion, formulated in an exaggerated manner, is, that “selling a hous is not wise”.

Especially if the cash is not desperately needed now. And keeping it still lets me the possibility open to live there later on.

Another supposition is, that if the house is sold, me and the siblings will have to wait until the regular heritage to “have something from the cash” (if any left).

At the moment I tend to take over the house, as this will give me passive income immediately and I still have the option to live there later. Also it offers me the chance to start gaining experience in property management and rental, but want to avoid negative profit – e.g. cashflow should be positive.

Now I wonder what you think about this in a very general manner. Is there something I did not pay attention to, that could influence my decision making? I am absolutely aware that the profit is low. But when the alternative is 0 passive income from the property its still better. How would you decide and why?

Cheers and happy weekend, TB

Cheers tb

2

You will have to think really hard.

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4

I’m in a similar situation regarding a chalet in a smaller mountain resort. Our concerted decision in the family has been to sell the chalet and then get the proceeds of the sale, after taxes, to the siblings in equal shares, as an advance on the inheritance. Personal conditions may vary so your decision can be different.

Would you buy that specific house for the cash equivalent of the advanced inheritance all other conditions (including financing) being equal?

My parents are biased toward real estate and me having a own home project was the trigger for them to want to give us an advance on the inheritance but I don’t find this very rational. It’s worth talking with them, in my opinion, since they’d be open to gifting you the house as an advance on inheritance, if the cash coming out of the sale cannot be used in the same way.

Assessing their needs and discussing about only part of the proceeds and having specific life projects to tout might help with this discussion. Preserving equitable treatment to all siblings might also (sure, the inheritance will be equitably divided at the time of death but having it in advance is an advantage for the one inheriting the house that the others won’t have).

This has a lot of value in my opinion. If you intend to potentially manage properties in the future, getting the experience is invaluable. I’d make sure that my parents and siblings understand that if things turn bad and that activity puts a strain on my life, I might sell the property at a later point, which could happen relatively quickly.

I’d make sure all siblings are agreeable to whatever setup ends up being enacted. I’ve heard of good inheritance stories (everything went fine on my mother’s side, for example) but inheritances also have a way to make burried emotional scars resurface, like childhood jealousy or having the feeling to have done more for the parents than the other siblings - this happened on my father’s side). The partners, who don’t have the same emotional bond with the deceased parents and the remaining siblings, can compound this. I would try to mitigate potential future conflicts for as much as I can.

Given the conditions as you have described them:

  • I would assume that the home is seen as an asset with some emotional value by the parents and potentially the other siblings. Either keeping it in the family or attachment to owning a home or real estate as an investment has probably played a part in the decision.

  • I would make very clear that I do not intend to live in the house for the foreseeable future. I would state my intent to rent it and reserve the right to sell it afterwards if things don’t pan out the way I expected (long periods of time without renters or accrued stress coming from the property management).

  • provided they agree to it, I would take the house. A bird in one hand is worth more than two birds in the bushes. I would make sure the other siblings are in agreement with it and that the way the value of the house will be calculated when the inheritance is shared is discussed and written down prior to the advance inheritance occurring.

That being said, before doing that, I would discuss with the other siblings about what they think the actual best solution is (which might include getting the proceeds of the sale of the house as advance on inheritance, using them to fund the parent’s retirement or a mix of both) and try to talk my parents into it.

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If you take the house, what happens with siblings? Do they get equivalent inheritance in tax? If not, do you have to pay them the share of the house they didn’t receive? If so, when do you need to pay this? How will the value be decided. These are things you need to clarify to avoid big disputes later.

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Absolutely. And if you need to pay them out, it‘s basically you buying 2/3 of such a house. Would you buy this house today? If not, sell and share the proceeds equally.

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thanks for your replies and suggestions.

Yes it will be absolutely necessary to talk all these framework conditions through. so far no one really looked at it the way I do now. My parents just want to get rid of the house and my siblings dont want anything to do with it. And yeah, it will be essential to conclude in a written agreement, because we all know, opinions and feelings can change very quickly


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9

Usually and to my understanding, advances on inheritances distribute assets but keep the estate whole until the usual inheritance event happens (death of the relative). At that point, the value of the estate is assessed and each should get according to their share. If the house is worth more than your share, you have to pay out the other heirs accordingly.

I haven’t dug deeply into how a house distributed early would be valued. It seems tricky to me as the value derived from the use of the house should, in my non legalist opinion, be discounted from the value assessed at the death of the relatives. I would request the advice of a notary before proceeding.

10

As suggested, why not sell and have the parents donate the proceeds?

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Assuming you calculated everything correctly, did you also think about the government sometimes holding home owners hostage with changing/increasing regulations? Which will come as additional costs.

Also, having renters is not the same as diligently using and maintaining your own home. I would therefore expect more maintenance costs than before.

12

my rough calculation is:

rent: 12x3000 = 36k

Kategorie CHF
Maintainance & Prov. 16’000
Utilities 2’700
Property tax 2’350
income tax on rent 5’190
Total cost 26’240

Profit: 36k-26k = ~10k

13

A way around it would be to sell the house to one child and leave the payment outstanding. The value would be frozen at the sale price and the receivable would be inherited.

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14

Might not be fair to the siblings tho (they have to wait until getting return from their share of the inheritance).

15

Simplify your and your siblings’ life and (to maintain good relationships) have the parents sell the house and split the proceedings.

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16

I have gone through the multiple-years-process of advance inheritance of a house with a similar setting (3 siblings, one wants to take over the house).

Take-aways

  • If the various involved persons do not have some general knowledge of inheritance/real estate/taxes/law: Start all together with a visit to a notary. They do not only prepare all documents necessary for such a transfer but are also obliged to consult you in the matter (so that all understand the general mechanics)
  • You have a lot of freedom how to treat different aspects → a lot of talk is necessary. I.e
    • Determination of the price of the real estate → There are some limitation by tax law regarding discount on the fair market value. But the valuation can result in quite different numbers depending who you ask. I.e. you should consider the deferred real estate gains taxes (i.e. the taxes due if the parents would sell the property instead of heritance → in the process of inheritance the standard is, that those taxes are postponed).
    • Financing: loans by siblings, parents, banks, etc. incl. securities/interest
    • Division of costs for the process
    • Do the parents need (part) of the cash resulting from the transfer? → then a mixed transfer of cash/inheritance is possible
  • All things which can be settled at the moment of the transfer should, especially the price for the transfer and financing (other options become very complex due to different interests). We discussed many options, but at the end we agreed on a price for the house and the pay-out of the siblings by the new houseowner (IMO the easiest solution)
  • This can all be avoided if the house is sold → (Part of) the proceeds can then easely passed by inheritance to the siblings
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Yes, these are hidden costs bourne by the new house owner and not immediately obvious.

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One thing to consider is that one sibling taking the house (and paying out the others at a current fictional market price) can lead to unbelievable family-strife later on. Your siblings could hate you if the investment turns out great, or you could feel cheated if it turns out bad.

I have already decided that - should me and my sister ever inherit our parent’s vacation home - I would want to co-own until such time as my sister is willing to sell it.

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