Inheriting a house often comes with many costs

Q: My wife's father is planning to leave his house to her. He still has roughly 25 years to pay on it. When he does pass on, what will she be faced with as far as taking ownership, and what will she have to pay up front?
M.Y., via e-mail

A: "What she does will depend on whether the mortgage is paid off and whether she intends to hold or sell the house," says Gary Schatsky, an attorney and fee-only financial planner in New York.

"Obviously, if the house is paid for, she won't have to pay off the mortgage," he says. Also, if the value of the house is under $1 million, she will not have to pay federal estate taxes. Some states have lower thresholds regarding estate taxes, but most follow the federal guidelines, Mr. Schatsky says. Check with your state's tax office.

If the house is not paid off, says Schatsky, "she can sell it, refinance the mortgage, or just ask the current mortgage bank if she can continue the mortgage payments."

But if she takes over the house, she will have to pay real estate taxes, as well as insurance, utilities, and upkeep costs.

"Unless a family member decides to live there, recipients tend to sell an inherited house," Schatsky says. If she sells the house at its value on the date of her father's death, she will pay no capital-gains tax. If there is an incremental gain after the father's death, she will owe taxes on that gain.

Q: We were recently told by an investment counselor that stretch IRAs [IRAs that can be passed from one person to a beneficiary] are now available. How do they work, and are there any special requirements for the spouse before the "stretch" goes into effect?
S.E., via e-mail

A: "Some financial institutions are now offering 'stretch IRA's,' but it is important to understand that this is not a product, but a process," says Ed Slott, an accountant and editor of Ed Slott's IRA Advisor, a newsletter.

A stretch IRA, Mr. Slott says, "gives any beneficiary of an IRA the ability to extend the required period in which they have to take distributions out over their lifetime."

If you are a beneficiary at age 40, for example, you could "stretch" distributions out another 43.6 years.

A spouse who inherits a regular IRA should take possession of it, Slott says, and use the distribution rules that would apply to her based on her age, rather than the "stretch provisions."

Slott has a chapter on stretch IRAs in his new book "The Retirement Savings Time Bomb and How To Diffuse It," due out in January.