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What happens if I inherit a home with tons of debt attached to it?

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Q: My parents have an apartment that's heavily mortgaged, and I'm set to inherit it. What if they die before it's all paid off and I inherit the property: Do I inherit the debt? What about taxes?

Debt doesn't magically disappear when an apartment gets passed on, say our experts, and you'll most likely have to either take on the mortgage yourself, or sell the place to satisfy the debt.

"If the apartment has been pledged as collateral for a loan, anyone who inherits the apartment would take title subject to the associated debt," explains  Jeffrey Reich, an attorney with Schwartz, Sladkus, Reich, Greenberg Atlas LLP.

While the constitution specifies that you can't be accountable for your parents' debts, says Dean Roberts, a real estate attorney specializing in co-op and condo law at Norris McLaughlin & Marcus, the debt attached to their property would come with it, and from there, it's up to you to decide what to do. "One important question is whether you plan to take title and reside in the property, or to sell it," says Roberts.

If you're opting for the latter, you can simply use the proceeds from the sale to pay off the remaining loans. If you'd like to move in, however, you'll probably have to "refinance the debt to assume ownership," says Roberts. (As a rule, he notes, banks much prefer to refinance this kind of debt as opposed to simply re-assigning the loan in your name, so you'll have to go through the  standard refinancing process, including an assessment of your own finances). 

A few other scenarios to keep in mind: If you've got bad credit or debt of your own, or for any other reason can't secure a refinanced loan on the property, you'll most likely have to sell. Plus, if your parents' apartment is a co-op, says Roberts, you'll still be subject to board review and approval before you can move in. ("There is no automatic right to have someone assume ownership," he notes.)

And if the debt is so bad that the apartment is "underwater," so to speak? You can't be held personally liable for the excess debt, but any other assets from your parents' estate would be used to satisfy the debt. (Bad news if you've also got liquid assets coming your way.)

There is one silver lining in all of this, however. This kind of debt lessens the tax burden that comes with inheriting an apartment, Roberts tells us. "The value of the property would be reduced by whatever the balance due at the time of the transfer," he says.


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