- Initial Steps After Inheriting a House
- Taxes When Selling Inherited Property
- Preparing the Inherited House for Sale
- Sell Inherited Property With a Realtor You Trust
How to Sell an Inherited Home? Property Taxes and More
Navigating the death of a loved one can be emotionally exhausting and overwhelming. Not only are you trying to process the loss, but you also likely have an endless list of tasks as you work through their assets and debts.
Inheriting a house can benefit you financially in many ways but it also comes with a lot of work – regardless of whether you plan to sell it or keep it.
This guide will focus on what to do if you plan to sell an inherited house. It will walk you through the probate process, the taxes, and the steps you should take to get the most from the property. With these resources, you should have a clear path forward to make the most of your new asset.
Initial Steps After Inheriting a House
After you care for your loved one and feel confident that they are resting in accordance with their wishes, you can start to review their assets. The executor of the will can go over their debts and assets – including the property they passed on to you. This process will help you gain access to the inherited property and understand its value.
When a person dies, their assets are reviewed by the probate court. A lawyer or legal entity will review all of their credits and debts to ensure their accounts are settled. After this, the probate attorneys will allocate the remaining assets to the beneficiaries of the deceased in accordance with their will.
Many people believe the probate process is only for people who never left a will, but this is untrue. Think of it as the formal evaluation and distribution of the assets of your loved one.
“Probate can sound complicated and intimidating, but for most people, it’s a relatively straightforward process,” says Jane Haskins, Esq. who practiced law for 20 years. “Some states even have simplified probate procedures that allow you to settle a small estate without probate lawyers.”
For example, if a parent dies and they have two children, their assets would likely be divided equally, unless there was a will that stated one child should receive a greater share. The probate lawyer would pay off all of the debts of the deceased parent and then distribute the remaining assets and funds.
Not all funds go through probate. Retirement and pension accounts with beneficiaries and life insurance policies with beneficiaries both skip the probate process. Joint property (like a house that two people co-signed together) also skips probate if one of the co-signers is still living. Finally, money that has been placed in a trust will not go through the probate court.
If your loved one is still living but you know you stand to receive inherited property when they pass away, work with them to develop a will. This will ensure their wishes are carried out as planned and can streamline the probate process by carefully detailing their assets.
During the probate process, the probate attorney handling your loved one’s assets will likely schedule a home appraisal to review the inherited property. Their goal is to assign a monetary value to the asset based on current market trends.
For example, the house in its present condition might be worth $400,000. If that asset needs to be split between two children, one child might agree to buy the other’s stake in the house for $200,000. This gives one child full ownership of the inherited property and they will reap the entire profit of the home sale.
This property assessment is also valuable if the deceased person has several debts they need to pay. For example, the property value might be worth $400,000 but there is still $100,000 owed in mortgage payments.
If the relative had $25,000 in debt, then their true remaining assets are worth $275,000. In this case, it is important to sell the inherited property in order to pay off any debt and close the accounts of the deceased.
Clearing Debts and Liens
The final step of the probate process before distributing any assets is to clear debts and liens on your loved one’s accounts. A lien is a legal claim against an asset – usually a house. If a person fails to pay their debt, the creditor can usually claim the property as collateral. A big reason to sell inherited property is to clear these liens and pay off any debts that your loved one owed.
Debts come in all sizes and need to be paid before any beneficiaries can take control of inherited property. For example, the executor will need to pay off and close credit cards, pay off electric bills, and complete car payments.
An executor might even need to cancel gym memberships and subscription services so the deceased doesn’t continue to get charged after they pass away. A Netflix bill doesn’t seem like a large expense, but it is still an account that needs to be settled.
Once all of the debts are taken care of, the executor can distribute the remaining money and assets to the beneficiaries. At this point, you can take control of your inherited property and decide whether selling it is still the best course of action.
Taxes When Selling Inherited Property
Actually gaining access to your inherited property is a major step after a loved one passes away. However, when it is time to sell the house, there are more financial hurdles and tax requirements to consider.
In fact, you might want to hire a tax professional to help you manage this inherited asset. They can help ensure you have enough money set aside to pay taxes and navigate the home sale process smoothly.
Capital Gains Tax Implications
Capital gains taxes are levied after the home sale. This isn’t an issue you need to be concerned about until you sell inherited property. Even if you decide to sell an inherited home shortly after acquiring it, there are still ways to avoid paying capital gains tax. Here are four options to consider.
- Live in the inherited home. Instead of selling inherited property, you can make it your primary residence. There are several tax exemptions for people who sell their primary residences.
- Rent out the property. You might decide to turn the house into an investment opportunity and get rental income from it. This could be a good way to collect enough to cover your monthly mortgage payments until you are ready to sell the house. However, this just delays your capital gains tax bill unless you sell the house and buy another investment property of similar value – known as a 1031 exchange.
- Disclaim the property. If you do not want to deal with the stress of selling inherited property, you can disclaim it. The asset will usually go to the next beneficiary, usually another family member. This often works if there is more than one heir and one person wants the house more than the other.
- Sell the house immediately. Your capital gain is the profit you make on the home sale. If you are told the fair market value of the home and sell it immediately for that price, then you never gain any money on the home sale. This is one of the most common ways to avoid the capital gains tax.
Know your options and choose the best one based on your financial situation. You can also simply pay capital gains taxes on the home sale when the time comes.
Step-Up in Basis
Another key term to know if you sell an inherited property is the step-up basis. This is the idea that the assets of a deceased individual are updated to current market values on the day of their passing. This is a key part of asset allocation and will affect how you pay capital gains taxes.
For example, if an individual makes their will in 2010, they might value their home at $224,100 (the median home value at the time). If the beneficiaries are two family members, then one might receive the inherited property and the other might receive $224,000 in financial assets – like retirement funds.
This way, the assets are distributed equally. However, through the step-up basis, the value of the home would be adjusted to current times. In 2023, the median home price is $431,000. This means that if the house is in good condition, one sibling receives a significantly larger inheritance than the other.
The step-up basis is particularly important for those who want to sell an inherited property and avoid capital gains tax bills. The beneficiary can get an immediate value for the house and sell it as soon as possible before it appreciates.
Local and State Tax Implications
While the capital gains tax is often the main concern when selling inherited property, there are also state and local guidelines that you need to follow. This is another instance where a financial advisor or real estate attorney can help you. They can guide you through the process to pay taxes on your house or the major financial windfall that often comes with selling it.
Preparing the Inherited House for Sale
Even if you want to start the real estate transaction immediately, you might have to wait before you can actually list your inherited property. The real estate process takes time, and you want to make sure you get the most for the asset you just acquired. Here are a few steps to follow.
Choosing the Right Real Estate Agent
Hire a real estate agent who can find qualified buyers for the home. It is essential that you interview multiple Realtors before you choose the right one. This will allow you to find experts who have navigated your particular situation.
Ask about their experience with inherited property and what they know about property taxes in your area. Request a comparative marketing analysis (CMA) to test their understanding of the home’s value. You can also ask for their recommendations for repairs and upgrades.
If there are multiple owners of the home, make sure they are present for these interviews. They might have their own questions to ask the real estate agent to determine if they are a good fit. You also are working as a team to sell the property.
Decluttering and Cleaning
This is one of the most emotional parts of stepping into an inherited house. You will have to clean out the closets of your loved ones and decide what to do with their clothes, crafts, cooking equipment, and other belongings. This often means reliving memories of the person you cared for who is no longer around.
This is another instance when you might want to involve your siblings and other members of your family. They might want to keep certain items, like a jacket, watch, or award from your loved one’s time in the armed forces. The decluttering process also gives you time to say goodbye to the house and your loved one who lived there.
If the house is still full and you would like to clear it out quickly, consider working with an estate sale company. These experts can sell any belongings you don’t want and then donate anything that wasn’t claimed.
Repairs and Renovations
The next step is to determine what repairs you want to make to the inherited house. You can certainly sell the house as-is and list it immediately, or you can invest in repairs to make it more desirable.
If the house has considerable damage, you will need to market the property to investors and buyers who are interested in fixer-uppers. This could isolate a significant number of buyers who prefer turn-key homes. Conversely, repairing the home can broaden your buyer base, but it will take time and cost you money.
Consider getting the home inspected to evaluate what needs to be done before it can be livable. You might decide to make a few key improvements that make the property more desirable without completely flipping it for the new owner.
Also, ask your Realtor which upgrades have the highest return on investment (ROI) so you get your money back for what you put into the house.
Staging and Presentation
The final step before you can list the house is to make sure it is properly staged. You can either hold on to some furniture to showcase the layout of the home and help buyers imagine what it is like living there, or your Realtor can stage the home for you. Some agents will rent furniture and place it strategically to make the space seem large and welcoming.
Talk to your agent to see what you need to do for staging and how it can help you sell the home.
Handling Offers and Closing the Sale
Once everything is in order, you can take steps to list the inherited house. Your Realtor should cover the showing process and send any offers your way. While accepting a cash offer is often the easiest way to sell a house quickly, you also want to make sure you get the full market value.
If you suspect you will need to pay taxes on the sale, make a note of the final sale price, but also the closing costs, Realtor commissions, and repair costs you had to improve the home. You can deduct these costs from your total capital gains, potentially reducing or eliminating your tax bill.
Once the house is sold, you can take the inherited value and divide it amongst other family members if they are the other beneficiaries of the property.
Emotional Considerations to Sell Inherited Home
While you might want to work quickly to sell an inherited house, this process can take time. It might take much longer than you like. Even entering a home that a loved one owned can be overwhelming in the wake of their death. Parting with their belongings and selling the house is a major step and it’s understandable if grief overwhelms you.
Make sure you have a support system in place that you can lean on when things get rough. A partner, sibling, or friend can give you the strength to handle this asset.
Sell Inherited Property With a Realtor You Trust
Selling inherited property is a major step when handling the assets of a loved one. Acting quickly can help you get the fair market value for the asset while avoiding costly taxes. However, navigating the legal process of becoming the new owner can be emotionally fraught and exhausting. You need a partner to help you through each step.
Start by hiring a real estate professional who has experience with inherited property. They can become a personal representative through the appraisal and home sale process. They can also sell the property immediately so you can close this chapter of your life.
To find a real estate agent in your area, turn to the professionals at FastExpert. You can compare agents and choose the best possible Realtor for your job.
Losing a loved one is never easy. It’s even harder to take on the paperwork and endless tasks that come with selling inherited property. However, by hiring local agents you can trust, you can make this process as easy as possible.