Accredited Inherited Home Specialist- Laguna Hills Real Estate Agent
Tax Implications of Selling an Inherited Home
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 from the inheritance of the property itself. While laws may differ from state to state, the following resources will help you understand 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 home you’ve inherited for at least two years, you won’t be eligible for this exclusion.
You do get to take advantage of the stepped-up tax basis. Inherited properties aren’t eligible for the home sale tax exclusion, but you do get to take advantage of a 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 an inherited property, the tax basis is the fair market value of the property at the time of the previous owner’s death. This prevents adult children from owing substantial taxes on properties that have appreciated dramatically over the past several decades.
Know where and how to report sale proceeds. The IRS requires those who sell an inherited property to report proceeds as taxable income. The specific amount that will be taxable is based upon the fair market value and other improvements used to calculate the basis. This publication from the IRS 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 event. According to this article, it’s a good idea to report the sale of an inherited home even if no taxes will be owed.
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 to figure out the many nuances related to the financial obligations that come with inheriting real estate.
What to Do to Prepare for the Sale
After understanding the financial implications and determining that selling the property is the right course of action, you’ll need to prepare the home for sale. That means clearing out personal belongings, de-cluttering when necessary, and de-personalizing the rooms. The following tips and resources provide helpful information for preparing an inherited home for a sale.
Clean out personal belongings. This is one of the most emotionally challenging aspects of inheriting a home. Going through your parents’ or loved ones’ most personal belongings often brings back memories of the past. This article offers tips for clearing out your late parents’ home, including helpful tips such as hiring an appraiser to value belongings such as jewelry and antiques.
Hold a yard sale or estate sale. After divvying up cherished possessions to heirs, you may opt to hold a yard sale or estate sale for the rest of the belongings. As this article explains, homes show better on the market when clean and empty or staged. And, as this article points out, some generations are much less likely to have a desire to keep certain memorabilia or sentimental objects around.
Wait for the estate to go through probate. The estate must go through probate before you may sell the property. Most states have a summary probate process, but this is available only to small estates ranging in value from a few thousand to a few hundred thousand dollars. Most estates that include real estate and other assets will exceed this threshold.
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 is probably not the best idea. This article offers helpful suggestions for choosing the right real estate agent for your needs.
Pricing Your Inherited Home and Negotiating Offers
Pricing an inherited home to sell is one of the biggest decisions you’ll make, and it hinges on many factors, such as whether there is an existing mortgage on the property that must be paid off, whether the proceeds from the sale will be used to pay off other remaining debts, and of course, the current real estate market conditions. The following tips and resources will help you – along with the help of your real estate agent – determine the best listing price for your inherited home and negotiate with buyers to get the most out of the property.
Don’t expect to get your asking price. Most people selling a home base the listing price on comparable properties that have sold recently, but depending on market conditions (whether it’s a buyer’s market or a seller’s market), offers may 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 higher price than you’re willing to settle for. A high or unrealistic listing price turns prospective buyers away, while a lower, more reasonable price can attract buyers. A low listing price is sometimes even used as a strategic move to attract a multitude of buyers who may then enter a bidding war, meaning the seller ends up with a higher sale price at the end of the day. Price it low enough that it’s attractive to prospective buyers, but high enough that you have room to negotiate.
At the same time, 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 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. This article offers several tips for distressed sellers who need to sell quickly but also want to get a fair price for their properties.
Don’t be too eager to make concessions. Often, offers from potential buyers will ask for a lower selling price, seller assistance with closing costs, or even funds placed in escrow for certain repairs or improvements. This article offers several helpful tips for skillful negotiations applicable to both buyers and sellers.
Don’t accept the first offer you receive. Unless you’re lucky enough to get a full-price offer on the property (in a hot 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. In most cases, buyers will make an initial offer that is less than what they’re actually willing to pay and below – sometimes tens of thousands of dollars below – the listing price. This article offers valuable tips for playing hardball with counter offers and getting what you know the home is worth.
Educate yourself on the negotiation tactics buyers tend to use and decide what you will and will not compromise. 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 and clearly convey your expectations. It will also be easier to walk away from a deal that doesn’t meet your needs.
What to Expect During the Sale Process
The process of selling a home 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. From the offer to closing, these resources outline what to expect while you’re selling an inherited home.
Selling a home is a multi-step process beginning with market research and ending with a closing. This article from NOLO outlines the process of selling a home step-by-step. NOLO also offers a list of useful resources that are helpful for researching the market and comparing listing prices in your local area.
The property 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, cracked foundation walls, and other problems that could spell financial trouble for the buyers in the near future.
When multiple family members are involved, legal nuances and personality conflicts may arise. This resource provides answers to a variety of questions related to handling the sale of an inherited property, transferring ownership of properties between relatives, tax implications, and many other questions people who have inherited property may encounter.
Your real estate agent may hold a broker’s open house or a general open house. After listing a property, some real estate agents like to hold open houses to generate initial interest in the home. This article describes several things that typically happen after listing a property for sale, including open houses and the typical six-week “wall” sellers hit if there hasn’t been interest in the home after six weeks on the market.
Just because you’ve listed a home on the market doesn’t mean your expenses and obligations have ceased. 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 for lawn maintenance and other household maintenance tasks.
Hidden Gotchas When Selling an Inherited Home
Any real estate transaction can have its share of ups and downs, and the process of getting from offer to close is often rife with obstacles, as well. 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. The following tips and resources offer advice for coping with these hidden gotchas without having a total breakdown.
Wily 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, as this article explains.
Handle equal distribution carefully. Many wills specify that the estate must be divided equally between siblings or beneficiaries. This means the value of the estate must be distributed equally, but challenges arise when it comes to agreeing on the value of assets such as sentimental belongings. This article suggests ways to handle the equal distribution of assets among siblings.
Try not to feel guilty about items you choose not to keep. This article touches on the reality of divvying up belongings after a loved one passes and offers tips for determining what 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. This article explains that heirs may choose not to accept an inherited home at all if there are environmental concerns 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 an elderly 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 that will almost certainly arise during a home inspection. These issues, depending on their severity, can cost you thousands of dollars – or even the sale.
You and your sibling(s) may not agree – on the purchase price, on who gets to live in the inherited property, how necessary repairs should be handled, or really anything involving the property you’ve inherited jointly. Shocking, we know. But the truth is even siblings who otherwise get along quite well can find themselves in a heated argument about their former family home. This article offers tips for handling a home you’ve inherited with a sibling.
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 be enough to send even the calmest, coolest, and most collected person over the edge. Arming yourself with the information and resources provided in this guide will prepare you for any obstacles that may cross your path, making the sales process smoother and more bearable. Please feel free to contact me or someone from my team if you have further questions about this process.
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