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Inheriting a property from a loved one is both a blessing and a challenge. It’s obviously a blessing to have someone you care about care enough to leave you with something as substantial as a piece of property. However, navigating the situation can be like walking a tightrope of emotion and financial stresses. Figuring out how to sell an inherited property can be daunting, but getting it sold can also be a huge relief.
What to do with an inherited home?
Depending on what your needs are, you may want to move into it yourself, offer it to a member of the family, rent it out as a landlord, or sell it.
A common decision that beneficiaries make is to move into the property themselves and sell the home that they’ve been living in. This can be a great decision if there is an emotional attachment to the house, or if the location works given career conditions and social needs. Using the home as a primary residence is one of a few options that can defray the taxable gain on the home.
People do choose to rent the house that they have inherited in some cases. This way, they can preserve other assets and pay down outstanding debts with the rental income. A property management company can help defer the responsibilities and make this process easier.
The third option is to sell inherited property. There are a few ways to do this and still get fair market value for the property. Selling an inherited home involves paying capital gains taxes and estate tax. However, the proceeds from the home sale can give a buffer when loved ones have to pay capital gains tax.
Personal belongings and property
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Many families choose to hold an estate sale to clear the house of unneeded items after the original owner’s death. This part of the inheritance process can be emotionally draining, but it’s an essential one.
This is a great point in the process to enlist the help of friends and extended family. As with all aspects of the grieving process, it’s important that loved ones don’t stretch themselves too thin and try to do everything on their own. Leaning on support structures will make it all easier for you.
Sometimes family and friends aren’t available to help out with an estate sale, particularly if there is a geographic distance issue. In this case, it’s a good idea to hire a local estate sale company to handle the sale. These are available most everywhere. They’ll take either an upfront fee or a percentage of the profit from the sale.
Estate sale logistics
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What’s great about working with an outside company is that you don’t have to worry about anything. They’ll sell the personal property inside the home as designated by the family, coordinating advertising and logistics. Once the sale is over, they’ll clear out any remaining property in conjunction with the plan you put together.
An estate sale can generate some extra money for paying of capital gains tax or inheritance tax, particularly if there’s a lot of personal property that no one in the family wants to keep.
Once the sale is done, the house is ready to put on the market. A pre listing inspection on a home that’s for sale will allow a real estate agent to take on the property more quickly. Depending on your needs, you could also forego this process entirely and sell your inherited property as is to a cash buyer.
Measuring the emotional toll
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Losing a loved one is heartbreaking. We can easily become overwhelmed with everything that has to be done, that’s in addition to processing our own emotions. Though there’s no straightforward way to get through the grief that comes with loss, understanding the process of what happens with an inherited house can make it all less daunting.
Working through the process can take months. It’s important to know this from the outset, because otherwise you could get bogged down in the process. Selling an inherited home eventually feels oppressive and burdensome if you imagine it will go quickly.
Typically, inherited homes go through the probate process, which can drag on for months. If there are multiple heirs, the whole thing can get even more complicated and can go on for even longer. There are dual problems here – the emotional considerations and needs of the family, as well as the financial pressures from capital gains and estate tax. Selling an inherited house has a whole host of pressure and stress.
Adding to the emotional toll is the frustration of converting the property into cash by selling. Even when everyone agrees to sell the property, it can get complicated. Tax implications can be confusing, and inheritance tax is not easy to decipher. Any real estate transaction has tax implications.
Life insurance policies and expenses related to the loss of a loved one are another potential boost, but they can also be complicated. When a life insurance policy is bought, the assumption is that it will pay out to the surviving family upon the death of the individual. It isn’t always that easy, unfortunately.
This is all in conjunction with other financial issues that you might have outside of the loss of the loved one. If a family member has been a longtime caregiver for a sick loved one, they might have been drained financially already. At times, family might have to step back from their own jobs or juggle their own retirement in order to take care of an elderly or sick loved one.
Loss is never as simple or straightforward as we’d like it to be.
Find expert advice
Families should look into tax advice from an expert, either an estate lawyer or a tax professional, to ensure they are getting the best outcome. Federal tax and taxable home sale proceeds from the sale of an inherited home might not be clear.
Working with a personal representative who knows what the ramifications are taxwise gives loved ones a great deal of peace of mind.
Converting the property into cash by selling is complicated and sometimes confusing as taxes and governing laws must be factored into the equation. Property inherited sometimes comes with mortgage payments and lingering repair issues. Inherited property could have liens or back taxes. Oftentimes, retirement accounts, or retirement savings is not enough to cover all that is owed.
The Probate Process
Any property that’s inherited from an estate has to go through a series of legal processes. These are governed by the state and county that you live in, but on the whole they are similar. The whole process surrounding what happens to someone’s property when they die is the legal process called probate.
If the owner of the property had a legal will that was filed in a court, then some of the functions of probate can be skipped over. This is why it’s so important to have a legal will set up with a lawyer, because everyone dies. Everyone has property that will need to be addressed, even if they don’t leave something like an inherited house.
If the deceased owner didn’t leave a will, then the property goes to the next of kin. Next of kin is a determination that’s made by the state you live in, and there is a distinct legal hierarchy for it. Many people assume that they know who the next of kin is, but unless there’s a living spouse it might not be so clear.
Even in the case of a written a legally filed will, the majority of estates must go through probate. This is the government’s way of ensuring that the wishes of the deceased individual are followed.
Executor of the estate
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Each state has a specific set of its own laws that govern probate. Most of the time, the court will appoint an executor to carry out the instructions that are laid out in the will.
Instructions in a will are generally straightforward. They delineate how many people are heirs and what each person gets. If there’s an inherited house, that could either go directly to one individual, or it could be split among multiple people.
Probate laws govern the process of how property is given out. If there are any conflicts, the executor of the estate will lead the process through the courts until a judge makes a final ruling. If there is no conflict, many states allow for there to be no court involvement.
Executors often deal with the high emotions of family members who have lost loved ones. The level of stress and the emotional turmoil that families are under can translate into frustration with the probate process inheriting property and anger over the legalities.
Types of ownership
In the case that a will names a single person as the beneficiary of the property, the probate process is simplified. The new owner doesn’t have to discuss anything with joint-heirs about what to do with the property. For instance, a single beneficiary can sell property for any reason and without talking to other family members.
Most of the time, ownership of inherited property isn’t that simple. In most cases, a will names multiple people as beneficiaries. When this happens, there are multiple owners of a single property.
It’s rarely the case that everyone wants to live in the home together or that they can all agree on selling it through the same process. Some insist on an estate sale and a pre listing inspection before talking to a real estate agent. Others are adamant that the purchase price won’t be too far affected by working with a cash buyer.
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When there are multiple owners, conflicts often arise. In this case, family members work with the executor of the estate to come up with a plan to sell the home or trade it. Even with estate taxes, capital gains tax, and property taxes, it’s often still worthwhile to sell the inherited house and split the proceeds. This can make everyone happy.
There are unusual solutions for multiple owners. An individual heir might chose to buy out other heirs for a percentage of the market value of the inherited house. There is a lot of legal process involved, but it also avoids dealing with real estate agents. This could involve getting the mortgage paid off, or it could involve refinancing the home.
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Luckily, most states aren’t subject to federal estate tax. However, keep in mind that if the property is sold again, the seller will have to pay federal taxes on the proceeds.
It’s possible to avoid paying taxes on the majority of the proceeds from selling an inherited home. Most states have a law that allows the value of the deceased person’s property to be stepped up to whatever its fair market value was on the day they died. This is instead of using whatever value the property was at when the person actually gets access to it after probate. Remember, probate can lost for months or even longer.
Here’s an example. Say a couple purchased their home fifty years ago for $80,000. Today, it’s worth $200,000. In terms of inheritance, its “stepped-up” value will be set at $200,000. Now say that this couple had children, and those children have become beneficiaries now that both parents have passed on. If the children decided to sell the property, they will only owe taxes on the amount if it exceeds the basis price. For example, if the couple’s $200,000 home is sold for $210,000, taxes would be owed on $10,000 only. That’s a huge difference!
Capital gains tax
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Any gain that an individual makes on any kind of investment, whether it’s real property or a stock investment, is subject to capital gains taxes. There are two types of capital gains possible, long-term and short-term.
The only time capital gains taxes are owed is when an asset is sold. Short term capital gains taxes are owed for assets owned for less than a year. Long term capital gains taxes are owed for assets that have been owned for more than a year. All of these taxes are folded into the federal income tax that everyone must file every spring.
Long-term capital gains tax can range from 0% to as much as 20%. What that rate depends on the individual’s personal income and the filing status of their taxes. The higher the income status of an individual, the more money they’ll have to pay.
Short-term capital gains are taxed at a rate that’s the same as other kinds of income. This ranges from 10% to 37%, depending on income. Again, the higher the income level, the higher the gains taxes will be.
Let’s say that a home sells at a loss. This could happen if the home has dropped in value. In this case, individuals are eligible to apply a capital loss as long as they sold the home at fair market value in an “arm’s length transaction”. This is when an inherited property is not sold directly to a relative at a discounted price.
Selling Inherited Property “As-Is”
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Selling the home of a deceased loved one as-is involves getting slightly less than home’s fair market value, but the tradeoff is that the family can get on with what’s next. This type of real estate transaction si quick and easy, and it involves much less hands on work from family members than traditional sales.
Real estate agents typically want a home to be staged and cleared out, as well as repairs made. In this way, working with a real estate agent can actually be a detriment emotionally. Families usually would rather get through the process quickly rather than pouring everything into this interaction.
Another consideration is the knowledge of the property. If an individual was not ever the primary resident in a home, then they might not know what issues there are and what repairs might be needed. Should an heir try to sell a home with undisclosed issues in a traditional sale, they could be liable for repair costs. Liability all depends on how the heir sold inherited the property, either as the outright owner or as the estate’s personal representative.
If an individual is selling their own property, they often want to get the highest possible price. Inherited property is different because the proceeds are taxable income. Setting the list price for an inherited house, means considering both the tax implications and time investment.
When selling an inherited property for slightly less than market value, it’s possible to make even more money over time because there is less capital gains tax. Estate taxes are based on the tax filer’s personal income, but they’re also based on the amount that the property sold for.
The selling process for an inherited home has to take into account the tax rate and the possibility of capital gains tax. No one wants to pay taxes when they don’t have to.
Not to mention the faster you can sell the property, the more you can walk away with.
Time versus Money
With each passing day that a home isn’t sold, the financial implications are far reaching. Not only is there the issue of capital gains on the rising value of the home, there’s also the issue of operating costs. Bills, upkeep, and even the mortgage are continued expenses that have to be paid.
An inherited home almost certainly has an existing mortgage. If the previous owners had a reverse mortgage, then that debt could also be a consideration. Those bills don’t stop because the person passed away. They go on to the heirs until the house is sold and the mortgage is paid off.
If someone’s parents purchased a home from a previous owner, it could have sentimental value, but it could also have high costs.
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Traditional home sales require the home to be cleaned and repairs to be done to the property. Potential buyers want to see that the home is in good working order. There’s a lot of time and energy that goes into preparing the home for sale. To attract buyers, a house has to be at a certain level.
Given the high tax rate and the high closing costs associated with selling an inherited home, a fast sale could be the best solution by far.
Paperwork and legal steps
When a family needs to sell an inherited home, getting that property sold fast for a good price is the number one priority. It’s a good idea to work with a company that specializes in purchasing inherited properties.
These individuals can help navigate the legality, paperwork and answer any questions. These companies offer fast, hassle-free, all-cash closings, making the entire process simple and straightforward.
Working with a professional home buyer
It’s hard to even fathom what the next best step is in many of these situations.
There’s so much more to losing a loved one than just taking care of their inherited home. Professional home buyers buy and sell property every single day. They understand the process inside and out, and they can help families to figure out what’s the best way to deal with inherited properties.
Companies offer free consultations to anyone seeking advice. Working with a home buyer should never cost you out of pocket.
Simplify the home selling process
Working directly with a professional home buyer simplifies the process. Sellers should work with a personal representative to tackle any issues and to figure out what the best options are. Everyone’s situation is individual, especially when there’s a loss involved.
If a seller isn’t satisfied with the services provided, or with the offer they’ve been given, they should always feel empowered to decline and move on. That being said, it’s always a good idea to bring an open mind to this process. What works best given the pressures surrounding this loss? How can people lean on supports when the process seems overwhelming?
The simpler everyone can make the process, the better it is for everyone. Especially the grieving loved ones. Keeping the process moving, even through probate and tax considerations, can make it all a little less of a struggle.