Inheriting a house can be an emotional process. In the circumstance of inheritance, you are likely mourning the loss of a loved one while also having to simultaneously manage assets and finances. Receiving a home through inheritance can seem confusing and complicated at first, but this guide will provide valuable information to help you make the best decision in your current situation.
What is the Current State of the Home?
The mortgage and physical condition of the house will strongly impact what steps you should take immediately after inheriting the home. A home that has been paid off will have different implications than a home with a current mortgage.
- Inheriting a house that is paid off- if you have inherited a house with no mortgage, the good news is that you do not have to worry about this costly expense. The deceased owner may still owe property taxes or have other outstanding bills that will need to be paid. Even without a mortgage, a house will have costs for utilities, taxes, and repairs.
- Inheriting a house with money owed- According to federal law, a mortgage lender cannot demand the house be paid in full upon death of the owner. There are many approaches to paying off the remaining amount on the mortgage. The initial mortgage could be refinanced, life insurance could be enough to cover the cost of the house, or the home can be rented or sold to pay back the remaining debt.
Whether the home has been paid off or not, the state of the home can vary greatly depending on each situation. Sometimes, the owner was older at the time of death and unable to conduct repairs and care for the home.
Get an Appraisal
The best way to determine the value of a home is to have it appraised. Knowing the house’s worth can help you decide if you want to keep the house, rent it, or sell it. An appraisal may reveal previously unknown damage or other repairs needed in the home. This value will also determine how much is owed in taxes.
Inherited Property Taxes
The initial inheritance of a home does not indicate taxation, but the action taken after receiving the home will determine tax implications. You may have to pay taxes on your deceased parent or relative’s home, but that depends on if you move in, rent it, or sell it.
- Capital gains taxes- This is a tax you will owe to the federal government based on profits from the sale of an investment. The profit is based on how much the investment was originally purchased for and the amount at which it was sold. The capital gains tax on inherited property is often protected by the step-up tax basis.
- Step-up tax basis: If you inherit a property and decide to sell it, the market value of the home on the date of inheritance is the starting point for any profit to accumulate. For tax purposes, the initial value of the home is not the price of the original purchase, but rather the market value of the home when it was inherited. If the value of the home increases between when it was inherited and when it is sold, this is counted as a profit and can be taxed. Therefore, many do not have to pay a capital gains tax on inherited property sold.
Any costs associated with selling the home can be written off as a loss on your tax returns. To report the sale of inherited property on your tax returns, be sure to accurately state all of the details of the sale. You will need to report the day of inheritance, the value at inheritance, the day it was sold, and the value at which it was sold. If you inherited and sold the house with siblings, you can only claim your portion of the tax return.
Selling an Inherited Property
If you have gone through the appraisal and decided the best decision is to sell the home, there are many options available:
Sell the inherited property to a sibling
You may have decided you do not want to live in the home, but your sibling does. This situation is not always easy to navigate. The sibling can pay you in cash for the cost or share of the home, take out a mortgage, or make a form of private arrangement.
Sell the home using a real estate agent
If you have the financial resources, this could be a great way to sell the house for more money. It will require making any repairs and removing the belongings of the deceased in a timely manner. Selling a home with a realtor might cost you time and money upfront, but some of these costs could be written off as a loss on your tax return.
Sell the inherited property to a professional home buyer
This is a great option for selling the home with minimal effort, or to split the proceeds among family members. Selling the home for cash does not require any form of renovations and can significantly decrease selling costs. In addition, selling the property to a professional home buyer is often a quick and straightforward process.
If you have recently inherited property and are unsure of how to proceed, Pavel Buys Houses can help. We serve as a resource for anyone in Massachusetts looking to sell their home for cash. If you want to discuss your situation or receive a free cash offer, contact us today!