Inheriting a house from a loved one can be a wonderful gift and a challenging situation to navigate all at the same time. Depending on the circumstances, you may have a few options on what you can do with the home, such as move into it, rent it out, or sell it.
One of the more common choices for beneficiaries is to move into an inherited home and sell the property they’ve been living in. In other cases, if you inherit a home you may choose to rent the home out as a source of income. Or you can hold an estate sale to sell off unneeded items before selling the home itself. If you’re planning on selling an inherited house, this guide can help you avoid the usual pitfalls and obstacles that can cost money, prolong the process, and add to your frustration.
Understand the variables of inheriting a home
There are a few questions you should ask before deciding if selling an inherited house is the right decision.
How much is the home worth?
Online home value estimate tools are a great way to get an initial understanding of the home’s worth. You can also compare the home to other similar properties in the area, known as real estate comps. However, the amount you see doesn’t necessarily mean you will be able to sell your inherited house for that amount. The price depends on a variety of conditions like the house itself and the local housing market for your inherited home’s area.
What’s the outstanding mortgage?
You’ll also want to find out how much is left to pay against the mortgage or loan on the house, which you can find out from the mortgage company that holds the loan. Then, you can use a home sale proceeds calculator to find out how much you can make selling your inherited house.
Are there other outstanding debts?
Besides what’s left on the mortgage, are there any other outstanding bills you need to account for? Were property taxes paid every year or did they slowly pile up? Will you have to use the proceeds from selling the home to pay them off? Are there any liens against the property, or does the property have a clear title? These questions can help you determine if now is the right time to sell the house or if there is some work to be done beforehand.
How many people are inheriting the property?
Selling an inherited house will largely depend upon how many individuals might inherit a portion or percentage of any given property. Do all involved agree that selling the inherited property is the right choice? Who’s going to manage the process of the estate sale and who will work with the real estate agent in selling the house itself?
Capital gains and other tax implications of selling an inherited house.
One of the first things you’ll need to evaluate when considering selling an inherited home is how the sale will impact you financially. In other words, you may be subject to taxes on any proceeds from the sale or just from the inheritance of the property itself. While laws will differ from state to state, the following tips can give you a guideline of the tax implications of selling an inherited property.
Inherited properties do not qualify for the home sale tax exclusion.
Typically, when you sell a property you’ve lived in for at least two of the previous five years, you can take advantage of a tax exclusion. That means up to $250,000 of proceeds for a single homeowner is tax-free, and married couples can avoid paying taxes on up to $500,000 in proceeds. Unless you plan to live in the inherited home for at least two years, you won’t be eligible for this exclusion.
Inherited properties may be able to take advantage of the stepped-up tax basis.
Ordinarily, proceeds are calculated using the purchase price plus any improvements made to the property during ownership. In the case of inherited property, the tax basis is the fair market value of the property at the time of the previous owner’s death. This prevents those who inherit property from owing substantial taxes on properties that have appreciated dramatically in value over the past several decades. In a nutshell, you won’t pay capital gains tax as long as the home is sold for its fair market value.
However, under the Biden administration’s proposed 2022 tax plan, this stepped-up tax basis is set to end. If you inherit a home, it is important to watch out for any changes in tax plans that may affect the taxes you owe after selling the home. It’s always best to speak with a tax professional who can help you understand any upcoming tax changes.
To learn more about how to sell an inherited home, connect with Laura Larson, her expertise and experience will help you to navigate the process.