How To Sell an Inherited House
November 15, 2022
The process of inheriting a property is very different from buying a house traditionally. There may be multiple inherited owners who must agree on any action and the property will need to go through a process called probate before it is officially transferred over. This can be a very long and complicated process. Although the process of becoming a homeowner traditionally and inheriting a house is very different, the process for selling the property is actually quite similar.
There are many of the same steps and processes. In fact, one of the biggest differences between selling inherited property and a traditional property is the taxes. In this blog post, we go through what you should consider before selling an inherited house.
What Happens When You Inherit a House?
Inheriting a property is when you are given ownership of a house or piece of real estate after the previous owner dies. This is typically passed down through a will or trust by a family member. When you inherit a property, you may not be the only owner. If there are multiple heirs, everyone will need to agree on what to do with the property. The heirs may decide to keep the property and live in it, rent it out, or sell it.
How Does The Probate Process Work?
Probate is when a will and all of the assets of someone who has died are validated. The will and the conditions are read out loud by lawyers in a court proceeding. Most wills have a specified executor included that will be in charge of distributing the assets according to the will. If there is no executor specified, the probate court may appoint one.
Transfer On Death Deeds. A TOD Deed is signed by the owner of the property while they are alive and states who will inherit the property when they die. This process of ownership change doesn’t go through probate and allows the property to transfer ownership much faster after the death of the owner.
Inheriting a House in a Trust. A living trust is a legal document that is created while the owner of the property is alive. It states how the owner’s assets like a house will be distributed when they die.
Selling a House in Probate. When a house is passed on to heirs through a will, there may also be debts associated with the property. The probate process is used to determine if there are any debts or taxes owed on the property. If there are, property may need to be sold to pay off these outstanding debts.
Selling Property When Multiple People Inherit a House
Sometimes a property is inherited by multiple people, which can be siblings, cousins, or other family members and friends. Having multiple owners or split ownership can complicate the process of selling an inherited property.
Split ownership means that all of the homeowners have to agree on how to proceed with the property. All of the owners have to clean out the possessions in the house and agree on who gets what. The owners also have to agree on the sale of the property. If the owners can’t agree, the property may have to go through a partition action. In a partition, lawyers present your disagreement inside a probate court and a judge determines what whether selling or not is the best course of action.
Tax Implications When You Inherit a Property
Fortunately, most states don’t have any tax liabilities when you inherit a property. However, if you sell the property, taxes are applied to the sale. Here are the taxes that are incurred when you sell inherited property.
Federally, there is no tax on inherited property. However, some states do have an inheritance tax. Six states tax inheritances: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Inheritance tax rates can range to as high as 18%, depending on the state in which you live. Many family members are eligible to be exempt from the inheritance tax or eligible to pay at a reduced rate. A surviving spouse, for example, is always exempt from an inheritance tax.
Capital Gains Taxes
Capital gains are federal taxes that you have to pay on the profits you make from selling an investment or property. The profit from the investment is the difference between the amount you purchased the property and what it is sold for. If you inherit a property and sell it, you may have to pay capital gains taxes on the profit.
Step-Up Tax Basis
Capital gain taxes on inherited property is based on the fair market value of the property. Fair Market Value is the price of the property at the time of the owner’s death. When you sell an inherited property, a capital gains tax comes from the difference between the fair market value and the purchase price the property is sold at. When a house bought in 1995 for $150,000 is valued today at $300,000 and then inherited and sold by the offspring for $400,000, the capital gains on the property would be $100,000.
Home Sale Tax Exclusion
The home sale exclusion is when your inherited house becomes your primary residence (property that you’ve lived in for two to five years) and is sold. The home sale exclusion allows you to exempt the first $500,00 in capital gains for married couples and the first $250,000 for single filers.
Mortgage on the Inherited Property
Monthly mortgage payments do not go away when the original owner dies. The mortgage needs to continue to be paid off after ownership transfers. If you inherit a property with a mortgage, you also become responsible for the mortgage payments.
Work With a Real Estate Agent When Selling an Inherited House
Finding a real estate agent to work with is easy but finding a good real estate agent can be very difficult. Luckily, there is a new type of real estate agent organization that streamlines your search for a high-quality and experienced agent. This group of agents is called the Negotiators.
Negotiators are handpicked from amongst the top real estate agents in the country that have all proven their ability to go above and beyond for their clients. By hiring a Negotiator, you’ll have someone on your side who has a wealth of experience in the real estate market and an unrivaled work ethic working to get you the best deal possible.
Search for a Negotiator if you want to work with a great real estate agent.