The passing of a loved one is a somber time, and working through the departed’s last will and testament can be stressful. This is especially true if a home is part of the inheritance.
If you do inherit a home, you’ll have a few options—move into the house, turn it into a rental, or sell it. If you decide to sell the home, you will need to be well-prepared, as there are some unique situations during the sale of an inherited home compared to a traditional sale.
Determine the value of the property
This is a good first step in the process. There are several factors that can influence the value of the property, including the condition and the location of the home. Contact a trusted agent to have the property valued and walk you through the rest of the process.
Check on the mortgage and outstanding debts
If the home wasn’t paid off before your loved one’s passing, you will be responsible for paying off the remaining balance of the mortgage. The selling of the home should settle any outstanding amount left on the mortgage, but if there is no mortgage remaining, you’ll own the property free and clear.
There are also a handful of unique situations you’ll need to be aware of when it pertains to the mortgage:
- Check to see if there is a due-on-sale clause. Some mortgages require the entire loan to be paid off if the property transfers from the original borrower to someone else.
- If there is a reverse mortgage in place, you may have a limited amount of time to pay it off.
- If there is more owed on the home than it is worth—also known as being underwater—you may need to get the lender to agree to a short sale. This means the lender will accept less than the remaining loan amount from the proceeds of the sale.
- The estate can also cover the remaining mortgage, meaning you’ll own the property outright.
In addition to the mortgage, check to see if there are property taxes or utility bills that that have outstanding balances.
Your tax responsibility
Inheriting a home doesn’t come with any initial tax liability. But if you decide to sell it, you will need to be prepared to pay taxes on the proceeds.
Selling inherited property requires you to pay the federal government capital gains taxes. These are taxes you pay to the government on profits you make from the sale of an investment.
The step-up tax basis helps protect you from paying a large amount toward capital gains taxes. You’ll inherit the home at fair market value, and your tax responsibility begins from the time you inherited the home and ends when you sell it. For example, if a home is appraised at $300,000 after the original owner’s passing and their heir sells it for $310,000, then the $10,000 difference is the only taxable gain.
You may also have to pay an inheritance tax, depending on your state. There are six states that have these laws: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The rules differ state by state, and each has different rules based on the estate size and asset types. Some of these states exempt the spouse and certain heirs from paying the inheritance tax.
There is also an estate tax in twelve states and the District of Columbia. Again, these taxes vary from state to state. But the exemption amount is a minimum of one million dollars in each.
Selling the home
When selling your inherited home, be aware that you’re responsible for several costs. These can include any surveys, agent services, and closing costs.
Renovate vs. selling as-is
One of the largest costs you’ll face selling an inherited home is repairs. However, you have two options: make the necessary repairs or sell the home as-is. Before you make the decision, it can be beneficial to get an inspection. This will help you better understand the renovations needed and make a better decision on what the return on investment (ROI) will be on potential repairs.
Both options have pros and cons:
- Selling a home as-is allows you to put the home on the market without making any major repairs. This could be a good option if there are numerous high-priced repairs. However, you will likely need to list the home below its market value, and an as-is listing can be harder to sell. You must also disclose any issues you find with the home.
- Renovating a home will help the home become more desirable to potential buyers and can help you sell the home at a higher price. However, you will be responsible for the cost of the repairs, and the time it takes to make the repairs could delay getting the home on the market, which can lead to you paying additional property taxes and utility costs.
Inheriting a home comes at a tough time in your life. But by going in prepared, the process can become a little easier.