A survey by HSBC shows that American retirees leave an average inheritance of about $177,000 to their heirs. Most of this inheritance in the form of property, trust, and real estate.
When presented with an inherited house, you have three choices – move in, rent out, or sell. Some homeowners choose to move to sell their inherited houses.
Selling inherited or gifted items is particularly difficult for sentimental reasons. Sometimes selling is the right decision. However, there are a few things you should know beforehand.
This piece will guide you through all the hurdles of selling an inherited house.
Make a Collective Decision
The decision to sell the house may not solely rest on one individual. If the will lists other family members as part owners of the house, then they should all be on board to sell.
When you are the sole owner, then you don't need anyone's approval. But even then, at least communicate your plan to close family members.
If it is a collective decision, you need to discuss the details of the sale, like who should carry out the transactions, when, and how to sell. If the property is in a trust, you have to work out who should bear the responsibility and decision-making.
Remember that these might be difficult decisions to make together, especially after losing a loved one. It is best to postpone the process if strong arguments erupt among concerned members.
Go Through Probate
Probate is a legal process that transfers the property of a diseased person to the beneficiary as designated in a will. It is a simple process done by a court judge who enters a court order that officially declares a new owner to the property.
Every state requires heirs to go through probate before selling an inherited property. The probate process and regulations are different in every state. So, learn about your state’s laws and procedures regarding probate.
Though it is not a lengthy process, complications may arise if other entities, liabilities, or assets are legally tied to the property. The executor may also delay the process.
Learn the Tax Obligations of Selling an Inherited House
An important thing you’ll need to know is how the sale will affect you financially. What are the tax implications of selling an inherited house? Proceeds from the sale of the house are taxable.
States have different laws regarding taxation of the inherited property, but some fundamental regulations are standard.
Unless you have lived in the property for at least two years, you cannot benefit from tax exclusion. Usually, tax exclusion waivers up to $250,000 for a single homeowner during a sale and up to $500,000 for married homeowners.
Secondly, you won't have to pay capital gains tax from the time of inheritance. Ordinarily, houses are valued using the purchasing price and any improvements done on the property. But in the case of inheritance, the government values the property at the time of the death of the previous owner.
This means you don’t accumulate taxes by the appreciation of the property since the previous owner died. However, should you hold on to the house for an extended period before selling it, you could be liable to taxation on the increased value of the property within that time.
The IRS requires that the sale be recorded as taxable income. Even if you don’t have to pay income tax on the sale, it still needs to be reported. The IRS publications clearly instruct on the right forms to fill and how to carry out the submission.
Real estate and tax laws are often a frustrating maze to navigate. This is one of the reasons you should hire a real estate attorney.
Prepare the House for the Sale
It is highly unlikely that you’d want to sell an inherited house as it is. While you wait for the probate to finalize, you may need to do some housekeeping in preparation for the sale.
The first step is cleaning out all the personal belongings and everything that you don’t want to sell. Select and take out the items you want to keep; they may be personal items of the deceased, family photos, books, or anything of sentimental value.
If there are things such as furniture that you’d like to sell separately, then you can organize a yard sale or have auction brokers take them off your hands.
This is also the time to do any repairs or facelifts on the house to help get a good quote. Your real estate agent may say, "We buy any house.” But small efforts like polishing the floor, a fresh coat of paint, and working on the lawn goes a long way in making the house desirable to potential buyers.
Negotiating the Price
To get the best possible deal, you may need to hire a real estate agent. With the assistance of a real estate expert in your area, you can reach buyers quickly and settle on a fair valuation of the house.
To come up with a fair price, you’ll probably match the value of similar property in the same area, but you also have to consider other things. After the taxes, commissions, legal fees, repairs, mortgage, and debts, how much money do you actually pocket?
Do not undervalue or overvalue the house because you stand to lose either way. If you quote a low price, you may end up worse off after the sale. If you price it too high, nobody will buy it.
Once everybody is comfortable with the price, close the deal!
Selling an Inherited House
With the right assistance and support, selling an inherited house is actually not that difficult. Perhaps the hardest part is deciding to sell in the first place or getting everyone involved to sell. The rest is just technical stuff.
Some may argue that it is wrong to sell an inherited house, but when it comes to it, sometimes selling is a reasonable decision. With this guide, you can make that decision while prepared to navigate any challenges.
For more tips on real estate and home improvement, continue reading our collection of informative articles.
