State laws regulating how to pay a deceased family member’s debts vary. Generally, most unpaid debts, including a home mortgage, become a part of the person’s estate, reports Bankrate. It isn’t until the estate is settled that any remaining assets are distributed to the heirs. If you inherit a house that still has an outstanding principal balance on the loan, you’ve likely inherited the mortgage and any tax implications as well.
Right of Survivorship
Just because a person dies doesn’t mean a lender forgives unpaid mortgage debt. If you owned the property with the deceased in a joint tenancy, the home automatically passes to you by right of survivorship. It doesn't matter whether you were married or not even related. Although property laws differ from state to state, if your name is on the deed and not the loan, the bank may let you assume the mortgage. If your signature is on the loan note, that makes you a co-borrower, and the bank will hold you responsible for repaying the loan. Either way, if the property has an outstanding mortgage, you'll be responsible for making the monthly payments even if you don't live in the home.
Lender's Right to Foreclose
Whether you inherit the home by right of survivorship or whether it's passed to you in a family member's will, when there isn’t enough money in the estate to pay off the mortgage, the bank will expect you to make the mortgage payments. Otherwise, the loan will be in default, giving the lender the right to foreclose, points out an article published on the HSH.com website. The bank could then sell the property to pay off the mortgage loan.
Providing you are a family member, the lender can’t enforce the "due-on-sale" clause, as long as you live in the home and keep the mortgage payments current, points out Bankrate debt adviser, Steve Bucci. The same goes if your name is on the property deed but you aren’t a co-borrower on the mortgage. If you don't live in the home, the rule no longer applies and the lender can call in the loan. A due-on-sale clause included in a mortgage note gives the lender the right to demand full payment of the loan when the property is sold or transfers ownership. Certain limitations apply.
Mortgage Interest Tax Deductible
As a result of your making the home's mortgage payments, the home mortgage interest you pay may be tax deductible. To claim a deduction for the interest you pay on the original mortgage loan, a second mortgage loan, or home equity loan or line of credit, you must itemize deductions on Schedule A of your federal tax return. Usually, home mortgage interest is fully deductible, but in some cases there are limits on the amount of interest you can deduct, according to IRS Publication 936 -- Home Mortgage Interest Deduction.
Deceased’s Final Tax Return
When a person dies, the executor of the estate, spouse or other appointed representative is responsible for filing the final tax return. Along with reporting income, you can write off deductible expenses the person paid during the tax year before he died. To claim expenses related to home ownership, you must itemize deductions on the deceased's return.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.