The roof is old. The house costs a fortune to heat. Over the years, tree roots have insinuated themselves into the sewer line. The property taxes and insurance costs are high.
You’re handy at certain do-it-yourself home renovation tasks. But this home needs an owner who’s dedicated to home improvement. The time has come to sell your inherited house.
Yes, in hindsight, it would have been better had you refused the deed in the first place. But you’d just lost a loved one, and your emotions were in control.
☛ If an inherited home has heavy debts or expensive upkeep needs, or for other reasons, you may decline an inheritance. Find out how beneficiaries may refuse to accept a deed.
Back when you inherited, the probate court took the deceased owner’s name off the deed, and you received the keys to the home. Fast-forward a year and a half. Now you have your eye on a new condo property in the city. So you call a local real estate agent and order an appraisal of the inherited home’s fair market value — if you don’t, relatives might second-guess your asking price.
Perhaps you inherited with a sibling who had no interest in the home, but expects a share of the proceeds if you sell it. If so, you should be able to sell the home and share its value, as expected. But you don’t want to learn from hindsight again. Before selling, understand the costs involved. How much debt needs to be paid off? How much money will you need for marketing the home, including commissions, fees, and closing costs? To navigate the transaction, you’ve already hired a real estate lawyer. This attorney is a highly reputable and neutral expert — one with just the right experience to know which details are important and which aren’t. Good move.
Note: If the deceased prior owner left a mortgage debt on the home, the mortgage was paid off in probate by the estate, or you refinanced. Perhaps you were allowed to assume the loan, under its original terms, or with modifications. The mortgage servicer can explain the terms that apply to a specific loan upon the borrower’s death. Several federal consumer protection rules help relatives who inherit homes and wish to assume their mortgages. Consulting with a wills and estates lawyer in your state is an important move to protect your rights and interests.
☛ Find out from Deeds.com what happens when a mortgage outlives the borrower.
Death and Taxes: How the IRS Views the Home Sale
If you can sell the home profitably, guess what? The IRS will be interested. If you profit on the sale, you’ll declare your profit as a capital gain. Fortunately, heirs get the benefit of a stepped-up cost basis. If you, as an heir, decide to sell, the only taxed capital gain is the appreciation in value between the prior owner’s passing and your sale now — that is, just the gain over the time you held the deed. The IRS doesn’t tax the home’s full rise in value gain starting from when the deceased prior owner first acquired the property.
To sum up: You’ll pay capital gains taxes on an inherited home if you sell it. The IRS taxes the difference between its fair market value when you inherited it to the price you get when you go to sell it.
Now, there is a difference between short-term capital gains and long-term capital gains. Because you have kept your inherited home for more than one year, you qualify for the lower long-term capital gains tax rate.
Can you can hold out and live in the house beyond the two-year mark (or live in it for at least two years of a five-year period of ownership)? If you live in the home more than two years, you may qualify for the capital gains tax exclusion when selling your primary residence. That’s up to $250,000 in profit (that is, the rise in value from the time of the inheritance), tax-free. Couples get 250K each. This exclusion is only available if you haven’t taken it on another house during the two years before you sell.
Before deciding to sell an inherited home, review the related forms, instructions, and updates from the IRS. Check in with your accountant or tax specialist on the best timing for your home sale, based on current IRS and state rules. Whether you have made a profit or not, report the sale of your inherited home on Schedule D and Form 8949.
One more thing. When you’re ready to sell, you don’t have to clean and renovate the house if you’d rather avoid that task. Today, many real estate brokers offer concierge services to clean and upgrade homes for sellers, with no upfront costs.
Alternatives to Selling an Inherited Home
Some heirs will place an inherited home into a family trust, where it can generate a cash flow. If you’re the lone homeowner, you might keep your inherited home to live in, and rent your own home. Or vice versa. The point is, an inherited home can offer sustenance to you or others without being sold.
Many inherited homes become rentals — including vacation rentals, local government rules permitting. Rental property income isn’t taxed as heavily as normal income. If you’re not landlord material, that’s fine. You can outsource that role to a professional property management company, with a small percentage of the monthly rent taken as a management fee.
So, where do you start? If there’s still a treasure trove of old objects in the house, you might pack up the photo albums and a few other cherished things, and distribute them to relatives and close friends. A couple of years after someone has passed, the letting-go process can be a lot easier to deal with. That said, it’s worthwhile to nurture heirs’ long-term relationships by respecting the will and any itemized instructions with it. So, refresh your memory on the will’s words about personal items. Don’t rush, and be sure to get the other heirs’ agreement on any decision you make.
As for the other items in the home, hold an estate sale. Locals will enjoy browsing and buying. If you prefer not to do this yourself, have an estate sale company plan and manage the sale.
Then, get the home up to code. Some heirs decide it’s worth taking out a home equity loan for major upgrades, if the plan is to keep the home as a rental property for many years. This takes good planning; you’ll need to have a good idea that the cost of borrowing, renovating, and managing the property will, in fact, pay off. Is it in an area where homes are generally rising in market value? If rental income covers your costs, and the home becomes increasingly valuable, you’ll likely be in a good position 20 years from now.
Pro tip: All current owners should be willing to be borrowers on the home equity loan. If not, a payoff agreement should be created by a lawyer.
☛ Here’s how a home equity line of credit affects a home’s title.
Specific expenditures on rental properties are tax-deductible, but home improvements generally aren’t. Rental properties depreciate over the years, according to tax policy. An owner should declare depreciation on the home according to the IRS schedule. When you eventually prepare to sell the house, speak with your tax professional about tax considerations.
Some heirs simply give the home to another relative or friend who needs it. If you do this, your individual gift deduction is $15,000 in 2021. Upwards of than that ceiling, each heir has to declare the gift, except when giving to a spouse. To stay of the right side of the IRS: If you individually give more than $15,000 in value in any year to any individual recipient (for couples who give or receive, the limit is $30,000), file IRS Form 709. It’s best to file it anyway, to prevent any later dispute about the gift home’s value. Filing Form 709 doesn’t mean you’ll pay any taxes on the gift if you subtract it from your lifetime gift tax exclusion: that’s $11.7 million in 2021.
Houses given to nonprofits are charitable donations; these have their own set of rules.
☛ See more on donations, gift deeds and gifts of real estate.
A Few Parting Notes
After weighing the costs and benefits of your alternatives, selling your inherited home might be your best path forward. If it’s just not the home for you, and you’re not thrilled about having it renovated, you can sell it. Bring in a real estate company with a concierge service. Or let willing buyers consider the home as a fixer-upper, to upgrade in the style they’d prefer. If you are not the only heir to the home, get a buy-in from your co-owners on the selling plan. A signed agreement puts everyone on the same page.
Note that tax rules and deductions do change over time. Be sure to check the updated Internal Revenue Code and consult with your tax specialist to take advantage of any supportive provisions the government offers.
And, once again, do seek neutral legal advice from an attorney who specializes in this area before selling an inherited home.
Photo credits: Jacques Bopp and Harli Marten, via Unsplash.