When Inheriting Real Estate Becomes a Challenge
Inheriting real estate is not always a blessing. It can also overwhelm the heir, as seen in the following situation.
The sudden, accidental death of parents Elsa and Peter is a shock to their three children, Andreas (48), Manuela (45), and Ulrich (38). Elsa and Peter planned well and put the most minute details of their financial affairs in order in the event of their deaths. The siblings know the contents of the hand-written testament and know where their parents keep it. They submit the last will to the competent authorities. Thirty days after the order to open the testament is issued, they can request a certificate of inheritance, which entitles them to dispose of their deceased parents' assets.
Real Estate Market Value
The parents bequeath to their children bank deposits of 150,000 Swiss francs and a downtown art nouveau apartment. It turns out that neither Andreas nor Ulrich is interested in the property. Manuela, on the other hand, always liked the three-room apartment. For that reason, she often imagined what it would be like to live there. Because she and her husband don't have any children, the apartment's central location is ideal for the couple. Manuela's husband agrees with the plan to buy the apartment and pay off the brothers. Just recently, the bank appraised the market value of the property at one million Swiss francs. Since the property still has a mortgage of 400,000 francs on it, the amount of equity in it is CHF 600,000. Accordingly, Andreas and Ulrich would each receive 200,000 Swiss francs.
Analyzing Your Personal Financial Situation
However, the buyers have some questions. Will Manuela and her husband's combined gross monthly income of 10,000 Swiss francs be enough to afford the mortgage? And how is the couple supposed to come up with the 400,000 Swiss francs to pay off her brothers? Together, their cash assets, including the 50,000 Swiss francs that Manuela inherited from her deceased parents, come to only 150,000 Swiss francs. The communications specialist and translator suddenly see themselves confronted with a slew of complex financial issues and are overwhelmed.
The Bank Can Advise You on Equity Capital
When examining whether Manuela and her husband can afford the interest charges on the mortgage and maintenance costs of the property, it is determined that the affordability ratio of 32.6% is just under 33% of their gross income. When factoring in an interest rate of 5%, they get annual interest charges of CHF 32,500, plus annual maintenance and ancillary costs (calculated at 1% of the market value) totaling CHF 10,000. However, they will not have annual repayment expenses since the loan is covered by the first mortgage. With a gross annual income of 130,000 Swiss francs and the extreme leverage within the first mortgage, the 45-year-old Manuela and her husband could afford a mortgage-backed credit of no more than CHF 650,000.
From the perspective of taxation, it is a good decision for Manuela to take on the property. In cantons without an inheritance tax on direct descendants, there is no tax on the transaction. Since Manuela is taking possession of the property from her brothers as part of a division of the estate, the real estate gains tax is deferred. It will not be owed unless Manuela sells the property to a third party. Depending on the canton and municipality, she should also expect to pay a real estate transfer tax if she sells. Since a later sale will subject the entire proceeds to real estate gains tax and Manuela will have to cover that cost herself, that should be taken into account when determining the property's value to be applied in the division of the estate.