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.
Additionally, should you hold onto the property for a while before selling it, you would be liable for taxes on any property value increase while you owned it.
Know how and where to report sale proceeds. The IRS requires those who sell inherited property to report proceeds as taxable income. The specific amount that will be taxable is based upon the home’s fair market value and other improvements used to calculate the basis. The IRS Gifts & Inheritances describes where to find instructions and which forms to use. Even if you don’t have to pay taxes on the sale, it is still a reportable transaction. A tax professional can help you understand how and where to report the sale on an inherited home.
There’s a difference between inheritance tax and estate tax, and even some differences among individual states. Tax law is by no means simple, so it’s best to seek the advice of an accountant or attorney. They can help you figure out the many nuances related to the financial obligations that come with inheriting real estate.
Prepare the inherited property for sale
After understanding the financial implications and determining if selling an inherited house is the right course of action, you’ll need to prepare the home for sale. That means clearing out personal belongings, decluttering when necessary, and de-personalizing the rooms. Here are some real estate tips for preparing an inherited home for a sale:
Clean out personal belongings. One of the most emotionally challenging aspects of inheriting a home is going through your parents’ or loved ones’ most personal belongings, often bringing back many memories. Though you can’t combine a lifetime’s worth of belongings with your own things, you should find a few cherished mementos for yourself and other family members. Then start organizing items into piles: what to give away, what to throw away, and what to sell.
Hold a yard sale or estate sale. After dividing up cherished possessions to heirs, you may opt to hold a yard sale or estate sale for the rest of the belongings. Homes show better on the market when cleaned and emptied. However, if the strain is too much considering everything else that is going on, you can contact an estate sale specialist who can help you sort through belongings and price them for sale. Once the house has been tidied, you can also think about making small upgrades to help the house sell for more.
Wait for the estate to go through probate. Should your loved one have a Will, the estate might need to go through probate, before you may sell the property. Probate is the official proving of the Will. Most states have a summary probate process, but this is usually available only to small estates ranging in value from a few thousand to a few hundred thousand dollars. Note that many estates that include real estate and other assets will exceed this threshold. If the decedent has a Revocable Living Trust, you will not need to go through the probate process. Talking with your loved one’s estate planner or probate attorney can be helpful if you have questions about the Will, Trust, or probate process.
Determine who holds the legal responsibility to handle the transaction. If the property owner left a Will, the executor is the person who has the responsibility and ability to distribute the assets of the estate, including real estate. If the property is in a Trust, the trustee holds this same power. In situations where siblings have inherited property together from their parents, one person often has the ultimate authority and responsibility to handle the real estate transaction.
Choose the right real estate agent. While it’s often tempting to choose a real estate agent based on who you know, enlisting the services of friends or family members to coordinate the sale of an inherited home may not be the best idea. It’s always important to ask a variety of questions when looking for the right real estate agent to make sure they have your best interests in mind.
Sell your home to an iBuyer. If the thought of preparing an inherited house for sale is tedious or too much to handle, you can consider selling your home to an iBuyer. iBuyers can help you sell your home fast by making a cash offer for your home. That means no showings and no repairs, which may be ideal if you don’t want to deal with the hassle of getting your home ready to sell and waiting for offers.
Pricing your inherited house and negotiating offers
Pricing an inherited home to sell is one of the biggest decisions you’ll make. It hinges on many factors such as if there’s an existing mortgage, other remaining debts, as well as the condition of the current housing market for your area. The following tips will help you determine the best listing price for your inherited home and how to negotiate with buyers to sell your inherited home for the right price.
Don’t expect to get your asking price. Most people listing a home for sale base the listing price on comparable properties that have sold recently. Depending on market conditions, offers might be tens of thousands of dollars below your asking price. Ultimately, the negotiation process determines the final selling price, so choosing a real estate agent who will advocate for you and negotiate on your behalf is important.
Don’t price the property too high. Ideally, you want to list the property at a realistic price – but at a slightly higher price than you’re willing to settle for. A high or unrealistic listing price turns prospective buyers away, while a slightly lower, more reasonable price can attract buyers. A lower listing price is sometimes even used as a strategic move to attract a multitude of buyers who may then enter a bidding war. Sometimes bidding wars mean the seller ends up with a higher sale price at the end of the day. Consider pricing the home low enough that it’s attractive to prospective buyers, but high enough that you have room to negotiate.
Don’t settle for less than the property is worth. Buyers want to get a home for the lowest possible price, while sellers naturally want to get the maximum price for the property. This is particularly true when the home is an inherited property that was once a family home where the sellers may have many childhood memories. This is why offers are sometimes countered and buyers and sellers end up agreeing on a final sale price somewhere in between the two extremes.
Don’t be too eager to make concessions. Potential buyers may submit an offer with a lower selling price, ask for seller assistance with closing costs, or even funds placed in escrow for certain repairs or improvements. Consult with your real estate agent before making concessions on an offer.
Don’t accept the first offer you receive. Unless you’re lucky enough to get a full-price offer on the property – in a seller’s market, this can happen if the property and price are right – don’t be too hasty in accepting the first offer you receive. Depending on the housing market, some buyers may make an initial offer that’s tens of thousands below the listing price and far less than what they’re actually willing to pay.
Educate yourself on negotiation tactics. Knowing what strategies buyers tend to use can help you decide what you will and will not compromise on. If you’re prepared with the knowledge of what to expect from buyers and already know what you’re willing to compromise and on what you intend to stand firm, you’re better equipped to make counter-offers. It will also be easier to clearly convey your expectations and walk away from a deal that doesn’t meet your needs.
What to expect during the sale process
Selling a home is a multi-step process beginning with market research and ending with a closing. The process can take weeks to months, depending on the condition of the property, market value and market conditions, and other factors such as the season and even the skills of your real estate agent. Here are a few key points to know when selling a home.
1. A home inspection is one of the most important steps in a real estate transaction. A certified home inspector will inspect and investigate every inch of the property to look for problems such as rotting structures, broken pipes, and cracked foundation walls. They can also identify other problems that could spell financial trouble for the buyers in the near future. You can have a pre-listing inspection that occurs before listing your home for sale, so you know if there are any potential issues with the home. This can be helpful rather than waiting for a buyer to make an offer on the property and finding an unexpected issue during the home selling process.
2. After listing the property, your real estate agent will likely hold an open house or even live video-chat tours to generate interest in the home. Just because you’ve listed a home on the market doesn’t mean your expenses and obligations have stopped. If the property has a mortgage, those payments must still be made on time. Utility bills, such as water and sewer, electric, trash removal, cable, and any other connected utilities must also be paid. You may also encounter additional expenses and even demands on your time to keep the property in tip-top shape.
3. The timeline for selling your house can vary, but when multiple family members are involved, legal nuances and personality conflicts may arise over handling the sale of inherited property. You may also have questions about transferring the ownership of properties between relatives, tax implications, among others. If questions arise, your real estate agent can provide advice about the home selling process and your relatives’ estate planner can guide you through any complex financial or tax processes.
Hidden hurdles when selling an inherited house
Any real estate transaction can have its share of ups and downs. And the process of getting from an offer to closing day is often rife with obstacles. Selling an inherited home is certainly no exception. In fact, you may be more likely to encounter some surprises simply because the circumstances are different or you’re not as familiar with the property as you think you might be. Here are a few things to keep in mind as you navigate the selling process:
Executors can keep an estate in probate for years. This enables the executor or other beneficiaries to have use of the home and other assets, without actually transferring ownership of the property. This is a temporary situation, however, as all property must eventually be transferred to another party.
Handle equal distribution carefully. Personal Wills may specify that the value of the estate must be divided equally between siblings or beneficiaries. Challenges may arise when it comes to agreeing on the value of assets such as sentimental belongings.
Try not to feel guilty about items you choose not to keep. Not only is it emotionally draining to sort through decades of cherished possessions and memories, but heirs are often riddled with grief and guilt about not holding onto every belonging that carries a memory.
If the property is “underwater,” you may have other options. Heirs may have the ability to disclaim, not accept, the inherited home, if there are issues like climate risks or more money is owed on the mortgage than the home is worth. You’ll also want to check to ensure there are no liens on the property before putting it on the market.
You may be facing more repairs than you realized. If the home was occupied by a loved one who was unable to keep up with regular home maintenance adequately, the property you’ve inherited could have both visible and hidden problems. These problems will almost certainly arise during a home inspection no matter if you’re selling a home in Atlanta, GA or Vancouver, CA. Depending on their severity, these issues can cost you thousands of dollars – or even a sale.
You and your sibling(s) may not agree on things like the purchase price, who gets to live in the inherited house, how necessary repairs should be handled, or anything involving the property you’ve inherited jointly. The truth is even siblings who otherwise get along quite well can find themselves in a heated argument about their former family home. If you’re selling an inherited home with your siblings it’s important to have the right resources at hand so you can navigate any disagreements.
Selling a home you’ve inherited from a loved one who has passed carries much responsibility. It’s already an emotional process and adding the typical stress that comes with selling any property can easily make the calmest person feel overwhelmed. Having the right information and resources can prepare you for any obstacles that may cross your path, making the sale process smoother and more bearable.
Redfin does not provide legal, financial, or tax advice. This article is for informational purposes only, and is not a substitute for professional advice from a licensed attorney, financial advisor, or tax professional.