Eventual fallout for existing loans on inherited property

September 27, 2022 8:44 AM

My father passed away a bit over a year ago, as a result of which, my brother and I each essentially inherited a house. Both houses had small existing loans active on them that are still active. What's the best course of action for dealing with those loans, especially for tax purposes?

So, my dad owned two residential properties - his place of residence and a rental. My brother and I are each currently occupying a house and have gone through the process where the houses are now in our names as far as the assessor and county are concerned. Both houses have active loans on them where the remaining principal is around 1/8 the total property value, with interest rates in the 3.5% range; I'm not sure of the remaining term on either loan, but I'm guessing 15ish years. Neither of the loans have been transferred to have myself or my brother as the person on the loan, so we can't claim a tax benefit for interest payments, but the interest payments end up being small enough that both of us would need a large amount of other deductions that we don't have to bother itemizing deductions anyway. Both of us have the ability to pay off the remaining loan any time we want, but would prefer not to since the monthly payments are small and we'd rather keep the money that would be used to pay off the loans invested elsewhere. I've looked into refinancing the loan on my house with my current bank, and it was a pretty ridiculous situation - if I made a down payment of $20K, I'd only succeed in pushing my loan back out to a full 30-year term and increase my monthly payment by about $15. Neither my brother or I have been able to talk to anyone at the current lending institution about whether assuming the loans as-is is possible, but if it were, I think that would be our preferred path. If that's not possible, what happens if we just leave the current loans as they are and the lenders keep filing 1099s for my father's estate? Does the IRS care about that? Would the bank? Is there any way we'd potentially get in trouble for doing that?

posted by LionIndex to Work & Money (6 answers total)

Best answer: I've looked into refinancing the loan on my house with my current bank, and it was a pretty ridiculous situation

When my father died, we assumed the mortgage on his house. We spoke with the lending institution who sort of wanted us to refinance with them but we found that, like your situation, the terms were horrible and we decided not to do it. They did tell us that they COULD make us pay off the mortgage in full (it's been a while, I don't recall exactly how this worked) because of the situation, but as long as we kept writing checks, they didn't honestly care. We wound up deciding to pay the loans off (which were about 10% of the total) because it was just a fussy pain to keep paying on them. My impression was that the IRS didn't care and the bank didn't care but some banks might. This was in Massachusetts.
posted by jessamyn at 8:53 AM on September 27, 2022 [1 favorite]

Response by poster: LOL, part of my plan for dealing with the existing lender is to threaten to pay off the loan entirely - either they let me assume the loan and make whatever off the interest payments for the next decade, or I pay it off right now and they get nothing. But the total interest left to pay on the loan probably doesn't amount to much, so it's not much of a threat.

Also, I have asked my tax preparer basically this same question, so I am getting professional advice.
posted by LionIndex at 9:03 AM on September 27, 2022

Best answer: the lenders keep filing 1099s for my father's estate? Does the IRS care about that?
Do you mean a 1098 that shows the amount of interest paid? I doubt the IRS would care about the name on the form unless someone tries to use that interest as a deduction. Since the amounts are so small, neither of you should do that until the 1098 has your name on it, if you do itemize.

If the rental property ever becomes a rental property again, then it would be worth the time and effort to get the mortgage into the owner's name. This is so you can claim the mortgage payment as an expense against the rental income.
posted by soelo at 9:50 AM on September 27, 2022

Response by poster: Do you mean a 1098 that shows the amount of interest paid?

Correct, my mistake.
posted by LionIndex at 9:53 AM on September 27, 2022

Best answer: I was looking at refinancing a small < $50K loan and it was, as you found, very expensive. Normally the closing costs get amortized to a certain extent, and most of them are not that dependent on the size of the loan, so that makes it even more expensive. I personally would try to get the loans assumed so I could write it off. My guess is that's either clearly anticipated in the contract, or impossible, so I'd check it out.
posted by wnissen at 11:53 AM on September 27, 2022

Best answer: This sounds probably OK and I would probably leave it alone if it was me, but one reason in favor of cleaning up the "name" on the loan - banks sometimes have processes where they check the taxes, title, etc., to make sure that everything is OK with their collateral. I am speculating, but I think it is possible that a change on the title/taxes could trigger some kind of bureaucratic/computerized exception, which could cause the bank to take some action like defaulting the loan. This is just guessing, and if you can pay off the loan in that scenario, it is probably fine, but a potential hassle.
posted by Mid at 6:51 AM on September 28, 2022