If you inherited a house from a loved one, it can initially feel like a very generous gift. However, if you’re inheriting a house, it likely means it’s an emotional time and you’ve lost someone you love. It can also be challenging to know what the best financial decisions are. There are both legal and tax considerations to keep in mind, as well as implications that come with selling any house, inherited or otherwise.
What To Know When You Inherit a HouseIf you’re in the position of deciding whether or not to sell an inherited house, there are some things to think about. These include:
- What is the home worth? You can use an online estimator tool or speak with an experienced real estate agent to determine the value, although this isn’t going to necessarily let you know how much the home will actually sell for.
- What’s the outstanding amount left on the mortgage or any loans on the house? This will impact your net profit.
- Are there are outstanding debts aside from the mortgage or any associated loans? For example, did the home’s previous owner keep up with property taxes?
- Is anyone else inheriting the property? If you’re sharing the property with, let’s say, several siblings, then everyone will have to be in agreement about managing the sale.
Tax ImplicationsIf you’re thinking about selling a home you inherited, you’ll need to calculate how selling it will financially affect you. Are you going to have to pay taxes on the proceeds or the sale, or will you be paying taxes on the actual inheritance? A few things to know about the tax implications of selling an inherited home include:
- If you’re the seller of a home you’ve lived in for at least two of the past five years, there’s a tax exclusion you can benefit from. This tax exclusion means up to $250,000 of proceeds is tax-free if you’re a single homeowner. If you’re married, you can avoid paying taxes on a home sale up to $500,000. Unless you live in the home you inherited for two years, you can’t use this exclusion.
- What you may be able to take advantage of, tax-wise, when selling an inherited home is the stepped-up tax basis. The tax basis is the fair market value of the property when the previous owner died. This helps you, as someone who inherits a home, because you don’t have to owe large amounts in taxes on properties that have gone up significantly in value over the past few decades. Essentially, you wouldn’t pay capital gains up to the point that the previous owner passed away. However, while you own the home if it goes up in value you are liable for taxes.
- There are significant differences between inheritance tax and estate tax, and they often vary between states. It can be a confusing topic for sellers, so you might want to speak with an attorney who’s familiar with these topics.
Getting An Inherited House Ready to SellIf you’ve done the math, understand the financial implications, and you’re ready to sell an inherited home, keep the following in mind:
- To appeal to the most buyers, you will need to clear out personal belongings. This can be an emotional experience, but you have to be disciplined in deciding what to keep and what to sell or throw away. You might want to have an estate sale or yard sale, depending on the contents of the home.
- Before you can sell an inherited home, the estate has to go through probate.
- If the person who owned the home had a will, they would have named an executor who is responsible for the distribution of assets, which includes real estate. The executor, or in the case of a trust a trustee, may have to handle the actual transaction to sell the home.