Inheriting a home often comes at a time when you are also faced with grieving the loss of a loved one. This can make it difficult to manage the responsibility of a newly inherited property. Knowing the process of what happens after inheriting a home can help you to make the best decision for your situation. This is a guide to help you understand the taxes, court procedures, and financial obligations involved with the inheritance of a house.
Inheriting the House
If the deceased person left behind a last will and testament, the beneficiary immediately inherits the property upon death. If a will was not previously created, the inheritance is dictated by state law. The laws for intestate succession usually indicate that the first in line to inherit the home is a surviving spouse, followed by children. Without a will, sometimes the inheritance must be decided by a probate court.
Tax Implications of Inheriting a Home
A concern for many who inherit a property from a loved one will be the taxes involved. Fortunately, there is no immediate tax penalty for the inheritance of a home. While there is not a federal inheritance tax, some state laws could lead to taxes after the sale of this inherited property.
Upon inheritance, the fair market value of the house is established by the IRS. This determines the new basis of value, also known as a step-up basis. When the house sells in the future, the increase in value from the step-up basis is used to calculate the tax amount due.
This tax implemented on the sale of an inherited property is called a capital gains tax. In general, a capital gains tax is applicable to any profit created by an asset. In this unique situation, the profit is not determined by the original purchase price of the home, but rather the profit gained after the moment of inheritance of the home.
For example, if the deceased person originally bought the home for $40,000 in the 1970’s, that is not the starting value for calculating profit. When the home is inherited, if the fair market value of the house is $350,000, this is the new tax basis. Choosing to sell the property immediately for $350,000 would mean you are not subject to any capital gains taxes because no profit was made. If you instead sold the home several months later for $375,000, then $25,000 would be the taxable profit.
Selling the house immediately at the same price of the inheritance value is not the only way to avoid the capital gains tax. You could qualify for an exemption of the capital gains tax. For an exemption, the house must have been your primary residence for at least two years in the last five years. You are only allotted one exemption every two years.
Financial Obligations of an Inherited Property
The profitable valuable of the home largely depends on the type of mortgage and condition of the property. If the mortgage has already been paid off, there is no need to take care of this remaining debt. An inherited house with an existing mortgage could fall into one of two categories:
- Assumable Mortgage- With this type of mortgage, payments can be continued by the heirs of the house. It is the most common kind of mortgage.
- Reverse Mortgage- If the mortgagor has a reverse mortgage and passes away, the home must be immediately paid off. The home is almost always sold in order to repay the debt.
Knowing the remaining amount to be paid on the mortgage and the type will help determine what you will do with the inherited house.
Inheriting a Home in Poor Condition
Sometimes you inherit a home in poor condition because the deceased owner was elderly or sick leading up to the time of passing away. This can create a challenging situation as you are deciding if it is more profitable to keep the house or sell it. You may not have the finances to carry out all of the necessary renovations. If you choose to keep the home, you will have to perform the ongoing maintenance required. For some, a good option includes fixing up the house before selling it. For others, however, selling the property ‘as-is’ is the best solution.
Managing Finances of a House Inherited with Siblings
In certain situations, the house may not have been inherited by only one person. Sometimes, the home could be passed down to a group of siblings. It can be tricky to navigate this circumstance when the siblings could differ in their opinions about what should be done with the house. One sibling may want to keep the house while the other wants to sell it. If a compromise cannot be agreed upon, siblings can sell their portion of the inheritance with other family members. It is important to make sure all debts have been paid and finances are in order before selling a share of the house.
Selling an Inherited House
If you have contemplated your options and decided you want to sell the inherited house, there are several ways to do so. The best option for your situation will depend on the condition of the house, your ability to participate in the house selling process, and the profit you are wanting to make on the sale. Here are 3 ways to sell an inherited property:
- Sell the house by owner
To sell the house without a real estate agent (FSBO), you will save money on commission with the sale of the house. It will be important, however, to have a strong foundation of knowledge about how to sell a house. You will have to manage all showings and complete the paperwork on your own.
- Use a realtor to sell the house
When using a real estate agent to sell the house you will likely receive the highest price for the property. This situation will require you to carry out repairs and thoroughly clean the house for showings. It may also take a long time before the house is sold.
- Sell the house ‘as-is’ to a professional home buyer
You can sell your house in any condition to a professional home buyer. This will allow you to avoid investing any time or money into the house. In most cases, the house is also sold much quicker. This is a great option if you are not in the position to dedicate the time to selling a house.
If you inherited a house and want to sell it, you will want to work with someone experienced in this unique circumstance. Pavel Buys Houses is a property solutions company that can provide you with advice and resources to ensure you sell your house fast. We buy homes in Massachusetts for cash, but we are also licensed real estate agents. We can help you decide how to sell your home to maximize its dollar value. To discuss your situation, or for more information on how to receive a free, no obligation cash offer, contact us today!