If you just inherited a property, then you’re probably feeling overwhelmed by emotions and stress. You most likely lost a loved one and must now handle the matter of their estate. The process of handling an estate can be a complicated and miserable process, but in this article, I’m going to try to help you uncomplicate that process. I’ll present you with the top three most critical questions you need answers to when you inherit a house.
But make sure to read till the end! At the end of this article is a link to another MUST READ article for someone dealing with inheritance and probate. I’ll also tell you how to get a FREE probate attorney!
1. DO I PAY TAXES WHEN I INHERIT A HOUSE?
If you just inherited a house, then you may have to pay two types of taxes. The types of taxes included are inheritance tax and capital gains tax.
Inheritance tax is a state tax paid by the person inheriting the property. It is paid before the property even comes into a beneficiary's possession. It’s also important to note that many states do not have an inheritance tax, such as Virginia. If you live in a state with inheritance tax, don’t worry just yet. Your state may have a list of people exempt from the inheritance tax. For example, Maryland has an inheritance tax, but immediate family members are excluded from this tax.
The second type of tax, capital gains tax, may come into play if you try to sell your inherited house. There are two ways that can cause you to pay capital gains tax. 1) You sell your inherited property in two years or less. 2) When you sell your house, you sell it above the tax assessed value. This second cause is easier to explain with examples.
- Joe purchased his house back in 1987. He paid $100 thousand for it and made $15 thousand dollars of repairs. So his tax basis before he died was $115 thousand. Sarah inherits Joe’s house. She has the home appraised, and it’s found to be worth $600 thousand at the date of Joe’s death. Sarah then sells the house 2 months later for $605 thousand. Due to the “stepped-up basis,” Sarah only pays capital gains tax on $5 thousand ($605 thousand-$600 thousand). If the “stepped-up basis” didn’t exist Sarah would have to pay capital gains taxes on $490 thousand ($605 thousand-$115 thousand) dollars.
CAPITAL GAINS FORMULA
(Sale Price- Tax assessed value at time of death)
There are a few vital details that you should know when considering capital gains tax. The first detail, the stepped-up basis mentioned in the example. The stepped-up basis is important because “Sarah” (from the example), did not have to pay taxes on $490 thousand, but only $5 thousand. The second important thing to know is that the tax assessed value used to calculate capital gains tax is the assessed value at the time of death. In the previous example, this would be the date “Joe” passed away. For example, if you choose to sell an inherited house a year and three months after your loved one’s death, the tax assessed value at the time of death is the number you use to calculate capital gains tax, not the date you sell the house.
2. SHOULD I SELL AN INHERITED HOUSE?
If you’re wondering about selling your inherited house, there are two key factors that you should consider.
- Can I afford to keep the house?
- Will I make a profit if I sell the house?
For the first question, owning two properties is just not feasible for most people. You’ll be paying multiple property taxes, mortgages, and other taxes and fees. And if you’re thinking about selling your current property and living in the inherited property, then you must consider how long it will take to sell your current property. If you're estimating that your current property is going to take around 3-6 months to sell, then you must be able to afford two properties for that entire time and possibly longer.
You can possibly make a profit selling your inherited property, but you need to consider taxes, who you’re going to sell the house to, how long it will take, and the time of year you’re going to try to sell the house. Selling your house with a realtor or by yourself can take time, time that you might not be able to afford.
3. HOW TO SELL AN INHERITED HOUSE.
If you’ve thought about your options and you’ve decided to sell your inherited house, then you must start thinking about how to sell the house. There are a few options with different pros and cons:
There are exceptions to each of these pros and cons, but in general, this is the case.
- For sale by owner
- Longer time on the market
- Less Profit
- Selling with an online source
- Faster than for sale by owner, but a longer time on market compared to using a realtor or investor.
- Cheaper than using a realtor
- Selling with a realtor
- Possibly a quick or slow sell (depending on realtor and conditions)
- Selling with an investor
- Quickest option
- Least complicated process
- How much profit depends on how much is owed on the property.
Selling your house with any of the first three options can take time, time that you may not be able to afford. If you can afford to wait, then you should consider the first three options. But keep in mind, time means money. The longer your house is on the market, the less profit that you’ll be keeping.
If you would like to sell your inherited property immediately, without hassle, and avoid paying any monthly mortgage fees, then I would recommend Express Homebuyers.
Express Homebuyers is a large and reliable real estate investment company that purchases inherited homes every month. But it gets even better! If you know you’re going to inherit a home, you’re currently dealing with the probate process, and choose to sell your home through Express Homebuyers; Express Homebuyers will supply you with a FREE probate attorney. This attorney will help you through the entire probate process, not just the real estate portion of probate.
In case you’re not familiar with the term probate, probate is the judicial process where a personal representative handles a deceased person's will and estate. If you would like more information on the probate and inheritance, I recommend reading “What to Do When You Inherit a House? A Guide to Selling Your Inherited House.” This article lets you know what questions to ask when going through the probate process. It also has an easy to read glossary for confusing legal terms.