What to consider when inheriting a home
Inheriting a house from a loved one can be a wonderful gift or a challenging inconvenience. Depending on your individual circumstances you basically have three choices on what you can do with the home: move into it, rent it out, or sell it.
If you’re planning on selling an inherited home this guide is sure to help you avoid the usual pitfalls and avoidable obstacles that waste time, cost money, and add to your frustration.
If you inherit property, it’s not as simple as getting the keys and the title to the house. There are multiple factors to consider whether you end up selling or not.
Know the worth of the home. Online tools like home value estimators are a great way to get an initial understanding of the inherited home’s worth compared to similar properties in the area. However, the amount you see doesn’t necessarily mean you will be able to sell the house for that amount, a lot depends on the condition of the house itself as well as the overall market conditions for that area.
Is there an outstanding mortgage or other debts/taxes on the property? You’ll want to also find out how much is left to pay against the mortgage or loan on the house, and contact an experienced estate planning attorney or realtor find out what selling the inherited house will net your family.
Are there other outstanding debts/taxes? Besides what’s left on the mortgage, are there any other outstanding bills you need to account for? Were property taxes paid every year or did they slowly pile up and now you have to use the proceeds from selling the home to pay them off?
How many are inheriting property? A lot will depend upon how many individuals might inherit a portion of any given property. Do all involved agree that selling the inherited property is the right choice, and who’s going to manage the process of the estate sale and selling the house itself?
Capital Gains and Other Tax Implications of Selling an Inherited Home
One of the first things you’ll need to evaluate when considering selling an inherited home is how the sale will impact you financially. In other words, you may be subject to taxes on any proceeds from the sale or from the inheritance of the property itself. While laws may differ from state to state, the following resources will help you understand the tax implications of selling an inherited property.
Inherited properties do not qualify for the home sale tax exclusion. Typically, when you sell a property you’ve lived in for at least two of the previous five years, you can take advantage of a tax exclusion. That means up to $250,000 of proceeds for a single homeowner is tax-free, and married couples can avoid paying taxes on up to $500,000 in proceeds. Unless you plan to live in the home you’ve inherited for at least two years, you won’t be eligible for this exclusion.
Inherited properties can take advantage of the stepped-up tax basis. Ordinarily, proceeds are calculated using the purchase price plus any improvements made to the property during ownership. In the case of inherited property, the tax basis is the fair market value of the property at the time of the previous owner’s death. This prevents those who inherit property from owing substantial taxes on properties that have appreciated dramatically in value over the past several decades. In a nutshell, you won’t pay capital gains tax to the point of the previous owner’s death. If you ended up holding onto the property for a while before you sold it, you would then be liable for taxes on any increase in the value of the property while you owned it.
Know where and how to report sale proceeds. The IRS requires those who sell an inherited property to report proceeds as taxable income. The specific amount that will be taxable is based upon the fair market value and other improvements used to calculate the basis. This publication from the IRS describes where to find instructions and which forms to use. Even if you don’t have to pay taxes on the sale, it is still a reportable event. It’s still a good idea to report the sale of an inherited home even if no taxes will be owed.
There’s a difference between inheritance tax and estate tax, and even some differences among individual states. Tax law is by no means simple, so it’s best to seek the advice of an accountant or attorney to figure out the many nuances related to the financial obligations that come with inheriting real estate.
Prepare the Inherited Property for Sale
After understanding the financial implications and determining that selling the property is the right course of action, you’ll need to prepare the home for sale. That means clearing out personal belongings, de-cluttering when necessary, and de-personalizing the rooms. Here are some tips for preparing an inherited home for a sale:
Clean out personal belongings. One of the most emotionally challenging aspects of inheriting a home is going through your parents’ or loved ones’ most personal belongings, often bringing back many memories. Though you can’t combine a lifetime’s worth of belongings with yours, you should find a few cherished mementos for yourself and other family members then start organizing stuff into piles: what to give away, what to throw away, and what to sell.
Hold a yard sale or estate sale. After divvying up cherished possessions to heirs, you may opt to hold a yard sale or estate sale for the rest of the belongings. Homes show better on the market when clean and empty and then staged. You can also think about making small upgrades at this point to help the house sell for more. However, if the strain is too much considering everything else that is going on, there are concierge type services that can do this for you.
Wait for the estate to go through probate. The estate must go through probate (the official proving of the Will) before you may sell the property. In California, there is a simplified probate process available for small estates valued at $150,000 or less. However, most estates that include real estate will exceed this threshold.
Determine who holds the legal responsibility to handle the transaction. If the property owner left a Will, the executor is the person who has the responsibility and ability to distribute the assets of the estate, including real estate. If the property is in a Trust, the trustee holds this same power. In situations where siblings have inherited property together from their parents, one person often has the ultimate authority and responsibility to handle the real estate transaction.
Pricing Your Inherited House and Negotiating Offers
Pricing an inherited home to sell is one of the biggest decisions you’ll make, and it hinges on many factors such as if there’s an existing mortgage, other remaining debts, as well as the condition of the current real estate market. The following tips and resources will help you determine the best listing price for your inherited home and negotiate with buyers to get the most out of the property.
Don’t expect to get your asking price. Most people selling a home base the listing price on comparable properties that have sold recently, but depending on market conditions (whether it’s a buyer’s market or a seller’s market), offers may be tens of thousands of dollars below your asking price. Ultimately, the negotiation process determines the final selling price, so choosing a real estate agent who will advocate for you and negotiate on your behalf is important.
Don’t price the property too high. Ideally, you want to list the property at a realistic price – but at a higher price than you’re willing to settle for. A high or unrealistic listing price turns prospective buyers away, while a lower, more reasonable price can attract buyers. A low listing price is sometimes even used as a strategic move to attract a multitude of buyers who may then enter a bidding war, meaning the seller ends up with a higher sale price at the end of the day. Price it low enough that it’s attractive to prospective buyers but high enough that you have room to negotiate.
Don’t settle for less than the property is worth. Buyers want to get a home for the lowest possible price, while sellers naturally want to get the maximum price for the property. This is particularly true when the home is an inherited property that was once a family home where the sellers have many childhood memories. This is why offers are sometimes countered and buyers and sellers end up agreeing on a final sale price somewhere in between the two extremes.
Don’t be too eager to make concessions. Offers from potential buyers will often ask for a lower selling price, seller assistance with closing costs, or even funds placed in escrow for certain repairs or improvements.
Don’t accept the first offer you receive. Unless you’re lucky enough to get a full-price offer on the property (in a hot seller’s market, this can happen if the property and price are right), don’t be too hasty in accepting the first offer you receive. In most cases, buyers will make an initial offer that is less than what they’re actually willing to pay and below – sometimes tens of thousands of dollars below – the listing price.
Educate yourself on negotiation tactics buyers tend to use and decide what you will and will not compromise. If you’re prepared with the knowledge of what to expect from buyers and already know what you’re willing to compromise and on what you intend to stand firm, you’re better equipped to make counter-offers and clearly convey your expectations. It will also be easier to walk away from a deal that doesn’t meet your needs.
The hidden hurdles when selling an inherited home
Any real estate transaction can have its share of ups and downs, and the process of getting from offer to close is often rife with obstacles. Selling an inherited home is certainly no exception; in fact, you may be more likely to encounter some surprises simply because the circumstances are different or you’re not as familiar with the property as you think you might be.
Executors can keep an estate in probate for years. This enables the executor or other beneficiaries to have use of the home and other assets, without actually transferring ownership of the property. This is a temporary situation, however, as all property must eventually be transferred to another party, as this article explains.
Handle equal distribution carefully. Many personal Wills specify that the estate must be divided equally between siblings or beneficiaries. This means the value of the estate must be distributed equally, but challenges arise when it comes to agreeing on the value of assets such as sentimental belongings. This article suggests ways to handle the equal distribution of assets among siblings.
Try not to feel guilty about items you choose not to keep. Not only is it emotionally draining to sort through decades of cherished possessions and memories, but heirs are often riddled with grief and guilt about not holding onto every belonging that carries a memory.
If the property is “underwater,” you may have other options. This article explains that heirs may choose not to accept an inherited home at all if there are environmental concerns or more money is owed on the mortgage than the home is worth. You’ll also want to check to ensure there are no liens on the property before putting it on the market.
You may be facing more repairs than you realized. If the home was occupied by an elderly loved one who was unable to keep up with regular home maintenance adequately, the property you’ve inherited could have both visible and hidden problems that will almost certainly arise during a home inspection. These issues, depending on their severity, can cost you thousands of dollars – or even a sale.
You and your sibling(s) may not agree on things like the purchase price, who gets to live in the inherited house, how necessary repairs should be handled, or really anything involving the property you’ve inherited jointly. The truth is even siblings who otherwise get along quite well can find themselves in a heated argument about their former family home. This article offers tips for handling a home you’ve inherited with a sibling.
Selling a home you’ve inherited from a loved one who has passed carries much responsibility. It’s already an emotional process and adding the typical stress that comes with selling any property can easily be enough to send even the calmest, coolest, and most collected person over the edge. Arming yourself with the information and resources provided in this guide will prepare you for any obstacles that may cross your path, making the sales process smoother and more bearable.
Decided Not to Sell? Learn How to Properly Gift Your Home as an Inheritance
If you would rather gift your inherited property to your children or a loved one, you should be aware of the tax implications of gifting.
In the video below, our attorneys discuss important issues related to gifting your home, such as capital gains tax, when to gift, and how to start the process.
Whether you ultimately decide to sell or gift your home, it’s best to consult an experienced estate planning attorney to ensure you avoid any potential tax consequences and unexpected complications.
For a free consultation, call (626) 307-2800 or click the button below. Our legal team speaks English, Chinese, and Vietnamese.