If you have inherited a residential property and do not want to live in it, you have three options: allow a family member to live there and pay the taxes, maintenance, and utilities; rent it out to someone; or, sell it outright. The first option will allow you to keep the home in the family, keep it in good repair without cost; and, gain more appreciation. The second option will also allow the property to appreciate in value, but will come with some costs and necessarily include becoming a landlord.
The third option is what most people who inherit property opt for, taking advantage of the opportunity to turn the residence into cash. However, unlike a home you’ve purchased, lived in, and then want to sell, there’s a bit of difference in this scenario. The biggest being that it will have to go through the probate process, during which time, there will be a creditors’ claim period.
That’s often the least concern for people who inherit a home, because it’s typically the result of the passing of parents. This usually means an emotional roller coaster, having to clear out the property, depersonalize it, and making any necessary repairs for it to be in salable condition. What’s more, there are other legal and tax issues which come into play.
Inherited Property Tax
There are four taxes which can be charged: estate taxes, inheritance taxes, property taxes, and capital gains taxes. Estates worth $1 million or more, which includes the home, bank accounts, investments, and other assets, are taxed by the federal government and some states. However, this is charged directly to the estate, not to the heirs.
“The basis for determining gain or loss on inherited property is the property's fair market value on the date of the decedent's death. Fair market value is the price that property would sell for on the open market. It is the price that would be agreed upon between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.” --Bankrate.com
That doesn’t hold true for inheritance tax, which is paid by the heirs, and is based on the net worth of their inheritance. The IRS does have a threshold for this tax, which is quite high and as a result, the majority of heirs can be exempt. Property taxes will also have to be paid by the heirs as they now own the home.
Last but certainly not least is capital gains taxes, which are typically paid after the sale of inherited residential property. Heirs can subtract the real estate agent’s commission, and the taxes are calculated by subtracting the market value from the sales price.
Selling an Inherited Home
To sell an inherited residence, you should first speak with a licensed real estate broker or agent. This will be of great help and allow you to avoid costly mistakes. In addition, a real estate professional will be able to evaluate any problems and help you decide what updates to make and which to avoid.
Another service to avail yourself of will be one which diligently searches for any liens against the property, which can cause the home to be legally encumbered and unable to be transferred. Ask you real estate agent about this. Here are some more tips for selling an estate home:
- Weigh the pros and cons of accepting the inherited property. If the property is underwater or in need of a lot of work, it might be smarter to forgo inheriting it and filing a disclaimer with the court. In the alternative, you can accept the home and sell it for cash to an investor.
- Make the right repairs and updates. To get the most out of the home, make strategic repairs and upgrades to make it attractive to buyers. The trick is to make smart, meaningful improvements and your real estate agent will help you identify these.
- Determine the right listing price. The price you list it for should be based on comparable, meaning very similar homes, which have sold in the past three months. If you want it to sell quickly, then price it just under the comparables.
- Allow an unbiased third party to do the negotiations. This is an emotional time for many, so, it’s best to leave the negotiations to your real estate agent, especially if the home is very familiar to you and you have fond memories about the past.
In addition, be reasonable about the situation. Though it will be a bit more difficult than selling your primary residence, it will go as smoothly as you allow it. If you're unsure about selling the property, consider making any necessary improvements and using it as a vacation home or renting it out and turning into a passive income source.