Losing a parent or loved one is devastating. And on top of it, there can be a lot to sort out in terms of assets, especially if the deceased person is passing on real estate. How they set up their estate (meaning all the money and property they own) can have a big impact on how the property is transferred to you and what you decide to do with it. Here's what you need to know about inheriting a house.

How Inherited Property Works

When a homeowner passes away, their house lands in probate. Probate is a court proceeding that divvies up a deceased person's stuff. It can be a slow process (it could take years before you get to use the Nantucket beach house your aunt left you), and it's expensive: There are court fees, appraisal fees, and other expenses involved. You may even have to immediately pay off the mortgage upon inheriting the home. "Every mortgage has a due-on-sale clause, and, legally, any transfer triggers it," says Jody Fay, a real estate attorney in New York and Connecticut with more than 20 years of experience. "But the reality may be that as long as the lender continues to be paid, they might not enforce the due-on-sale clause." Another downside to probate is that it's public record. If your family has any financial dirty laundry, it will be aired for everyone to gossip about—and suddenly your windfall may feel more like a burden.

Benefits of a Trust

Homeowners often place their homes in a trust to avoid probate. The main purpose of having a trust is to legally and smoothly transfer a home (or homes) to beneficiaries. "Trusts help provide a roadmap for family members—they spell out the homeowner's goals and desires for their property after they pass away," says Caroline McKay, a senior wealth strategist at CIBC Private Wealth with more than 15 years of experience in wealth management.

Types of Trusts

There are two types of trusts: revocable and irrevocable. Revocable trusts are controlled by the person who created the trust (the homeowner) and can be changed or amended at any time. In the instance of an irrevocable trust, the homeowner appoints a trustee to control their estate. Both types of trusts keep a house out of probate—and save beneficiaries a lot of hassle—but the biggest benefit of an irrevocable trust is that it also protects family members from estate taxes and inheritance taxes.

How to Set Up a Trust

In order to create a trust, a homeowner will need to hire a trusts and estates attorney. Setting up a trust requires you to shell out some money (experts put this at roughly $5,000, but it can vary based on the complexity of trust), and there's some significant paperwork involved, but it's in everyone's best interest. During this process, transparency is key. "The more conversations parents can have with their kids before they die about their intentions for their estate will help avoid squabbles between siblings down the road,” McKay says.

Taxes on Inherited Property

You don't have to worry too much about the federal estate tax, which is taken out of the deceased person's estate before you receive the home you inherited. You only qualify for this if your estate is worth more than $13.61 million (so not an issue for the vast majority of people)—and surviving spouses are exempt from having to pay that anyway. Only 11 states have estate taxes (Washington, Oregon, Minnesota, Illinois, Maryland, New York, Connecticut, Rhode Island, Massachusetts, Vermont, and Maine—plus Washington, DC) and the amount varies from state to state.

Inheritance taxes are fees you have to pay once the home officially falls under your ownership. There is no federal inheritance tax, and only six states impose inheritance taxes—Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey, and Maryland. Each state has its own guidelines. As an example, according to the Pennsylvania Department of Revenue, in Pennsylvania there is a 0 percent tax for transfer to a spouse; 4.5 percent tax to direct descendants (kids, grandkids); 12 percent if the house is going to a sibling; and 15 percent if the home is left to some other type of heir.

Should You Sell the Home or Keep It?

Inheriting a house also means potentially inheriting a mortgage, home equity loans, anf liens, along with whatever issues it may have (a leaky roof, cracked foundation, and so on). You can also get slapped with a capital gains tax if you sell. "The capital gains tax is 20 percent of the difference between the value of the house at the time the person died and the price you sold the house for," says Philip Camporeale, CPA, an accountant in Staten Island, New York. In other words, if the house was appraised at $1 million, and you sold it for $1.2 million, you would owe $40,000 in capital gains tax. So there are costs to consider.

On the bright side, if your loved one's house is in good condition, selling it can provide you with a nice nest egg. Or it may make more financial sense to sell your current home and move into the house, especially if it's paid off or has a much lower mortgage rate, which can make it more affordable to live in. "Many people move into homes that they inherit," says Lisa Ninow, principal broker at Stone Edge Real Estate in Park City, Utah, who points out that this can be an especially good option in the current market, with housing prices being so high. You could sell your house and make a profit, then move into this other house that you now own.

Things get more complicated if you have siblings and inherit the house together. In that case, you'll have to work out who will keep the house, if you are going to share it, or if you and your siblings are going to sell it. "An owner will usually include provisions in a will or trust about their intent for how the real estate should be owned or used. For example, if one child is currently living in the house and the intent is for that child to continue living in the house after the parents' death, the estate plan may include provisions specifically leaving the house to that child and equalizing the other siblings with other estate assets," says McKay.

Selling the house and dividing the profit evenly is a good way to dodge the potential relationship-ending fights that can occur in these situations, but sometimes siblings do choose to co-own the house (as in, you get the house in Jackson Hole for December break, and we'll take it for President's Day weekend), or one buys the other(s) out. This entails hiring a real estate lawyer and having the house appraised. After that, the sibling who wants the house agrees to pay the other(s) their share of the fair market value of the home.

Some people choose to hold onto houses that they inherit without living in them. If you like the house or its location but your job or your kids prevent you from moving across the country to live in it, consider renting it out for a while. This is especially wise if the home is in a place that you might like to retire someday, like in Florida, or in a vacation spot. And sometimes people just like to keep a special house "in the family." You can't put a price tag on the sentimental value of the beloved house you grew up in or the beach house full of so many fond summer memories.

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