7 Essential Tips on Inheriting a House and Selling It Quickly

Inheriting a house and selling it

When you are inheriting a house and selling it there are some very important things that you should understand before making a final decision on what to do.


1.  Is There Tax on Inherited Property?

the word taxes

You may be wondering what taxes you are going to have to pay when you inherit a house. The answer could be “Yes” or “No”. Let’s look at it closer…

When it comes to taxes that you will have to worry about when you inherit a house you will need to be aware of Estate tax and Inheritance tax. Federal Estate applies to everyone but only certain states impose a State Estate tax or State Inheritance tax.

Federal Estate Tax on an Inherited House

You only have to worry about Federal Estate Tax if your entire estate (after all debts) is more than $5.49 million. If it is more than that after all debts, taxes and all fees associated with the death and funeral than you will have to pay this tax of 40% (as of 2017).

Whatever amount the estate is over the $5.49 million exemption is taxable. For example:

If your final estate was $5.5 million you would owe tax on $5.59 minus $5.49 million = $100,000.   $100,000 would be taxed at 40% for a total tax owed of $40,000.

This could have an effect on the house you are inheriting because the estate has to come up with the $40,000 to pay the government. If that has to come out of the house, then it could get sold to pay for the tax.

It will depend how much cash there is to pay the tax and what the executor decides to sell in order to pay for the tax.

State Estate Tax on an Inherited House

State Estate tax will be very similar to the above federal tax except this is due to the state instead of the federal government.

There are only 14 states that collect a state estate tax as of 2017. Below are the sates, their exemption amount and the max percentage they tax it at:

  • Connecticut ($2 million / 12%)
  • Delaware ($5.49 million / 16%)
  • District of Columbia ($2 million / 16%)
  • Hawaii ($5.49 million / 16%)
  • Illinois ($4 million / 16%)
  • Maine ($5.49 million / 12%)
  • Maryland ($3 million / 16%)
  • Massachusetts ($1 million / 16%)
  • Minnesota ($1.8 million / 16%)
  • New Jersey ($2 million / 16%)
  • New York ($5.25 million / 16%)
  • Oregon ($1 million / 16%)
  • Rhode Island ($1.5 million / 16%)
  • Vermont ($2.75 million / 16%)
  • Washington ($2.054 million / 20%)

The exemption amount is how much your estate must be greater than before it will receive the tax and only the amount greater than the max exemption amount will get taxed.

This tax is paid in the same manner as we discussed under the federal estate tax.

State Inheritance Tax on an Inherited House

There are only 6 states that still collect an inheritance tax. Below are the states that collect an Inheritance tax and the max percentage they collect:

  • Iowa ($25 thousand on whole estate / 15%)
  • Kentucky ($1000 per person / 16%)
  • Maryland ($1000 per person / 10%)
  • Nebraska ($40,000 per person / 18%)
  • New Jersey ($25,000 per person / 16%)
  • Pennsylvania (No Exemption amount / 15%)

**The important thing to note about the inheritance tax is that I only put the max amount for the exemption and the percent rate. There are several things that will make an exemption or percentage less than what is listed above. The above lists are used mostly just as a ball park reference amount. You should look at your state for the exact amount for your situation.

Inheritance tax will be taxed based on the amount that each person is receiving in their inheritance. If you inherited a house in Kentucky worth $300,000 with a $100,000 mortgage it would be $200,000 minus the $1,000 exemption = $199,000 total taxable amount.

One thing to note about all the taxes is that if you are the surviving spouse in almost every situation whatever you inherit is exempt from being taxed.

Also, the closer you are to the deceased the less you will end up having to pay in taxes. All amounts for taxes I have given are the max amounts. To see how much you will actually pay for your state based on your relationship with the deceased you will need to look up your specific state online.

For detailed info on each state’s State Estate taxes go to: https://www.nolo.com/legal-encyclopedia/state-estate-taxes.html

For detailed info on each state’s Inheritance tax go to: https://www.nolo.com/legal-encyclopedia/state-inheritance-taxes.html


2.  Are There Taxes on Selling an Inherited House?

 

When it comes to selling an inherited house you need to be aware of the potential taxes you might have to pay.

When someone sells a house that they haven’t lived in as their primary residence for 2 of the last 5 years they will have to pay up to 20% capital gains rate on the profit from what they bought the house at previously plus any improvements.

If you have lived in the house for 2 of the last 5 years before the sale of the house then you can exclude $250,000 of your capital gains and for married couples filing jointly you can exclude $500,000. You can also claim this exclusion once every two years.

But what if you inherit the house? You most likely have not lived in it for 2 of the last 5 years. The cool thing when you inherit a house is that you get a Stepped-Up Tax Basis. This means that the house basis is reset to the current fair market value.

It is like you just bought the house at current fair market value. For example:

If your Dad purchased the house for $75,000 30 years ago and then he passed away. You inherit the house and the current fair market value is $300,000. You then sell the house for $315,000. You would only pay capital gains tax (CGT) on $15,000.

To find quickly and easily find the fair market value of your house, check out my FREE Property Value Estimator Tool.


3.  What if a Sibling Lives in Jointly Inherited House?

 

If a sibling lives in jointly inherited house you might be wondering what your options are.

One thing you could do is move in the house and live in the house with your sibling. If you don’t want to live in the house, then maybe you want to sell it.

If you want to sell it and your sibling doesn’t then the other sibling could buy you out. The other sibling could get a mortgage to finance your half of the house or if there were other things inherited in the inheritance they could trade something else of equal value for your share in the house.

If the sibling isn’t able to get a mortgage or trade something of equal value you could always be the bank and finance your share to the other sibling. You would receive extra income every month from it. This is called Seller Financing and you could look up an amortization for a certain number of years to determine how much interest you would charge and what the monthly payment would be.

You could also put a lien on the house so that if the sibling doesn’t pay every month you could file a foreclosure to force the sale of the house.

If finally, you both can’t reach an agreement you could take it to court where the judge could force the sale of the home to get you your share in cash. The judge will look at the Will to determine the intentions of the deceased and what would have been in their best interests.

I would use the court option as a last resort because this could have a major emotional impact on the sibling if the house if being forced sold. If the house is being forced sold there is nothing stopping the other sibling in being the highest bidder and purchasing the house themselves if they are capable.


4.  Do You Keep the House, Sell It or Rent It?

 

person thinking of selling or renting houseThis is something you will want to think carefully about. This could be a very emotional time for you and you may have a lot of memories in the house.

You may be considering keeping the house and holding onto those memories. It may not be a good decision to make a decision based on your emotions. You want to make sure that it makes good financial sense as well.

If you just keep the house and let it sit there you will still have to pay the property taxes that are due and they can get as high as $7,000 a year in some states. You will still also have to pay the power and water bills if they are used. Also, homeowners insurance can be as high as $1,700 a year.

One thing you might not be thinking of is if no one is living in the house for a long time then the house will easily start to decay and fall apart. The house could get so bad that you won’t even be able to sell it for very much money without major repair being done.

You best option if you do want to keep it would be to rent it out. At least with a renter in there it will keep the place from falling apart. It will also put some extra money in your pocket every month.

The problem with renting though is that you would have to be the landlord or you could hire a property management company to manage your house for you. They typically charge from 10% to 15% of the monthly rent for their fee.

Just be aware that you could always run into a bad renter that could do a lot of damage to the house so be sure to screen very thoroughly before picking your renter. You would want to look at the last house they rented, talk to their previous landlord about them, do a credit check, get references from them, proof of income, etc.

You could also just rent it as a vacation house in the summer or winter depending on where it is located. This would allow you to still walk through the house with no one in it sometimes and then have some living in it other months.

Renting also isn’t a bad option if you believe the market it going to keep moving up. You could hold on to the house a little longer and make even more money out of the house.

You could also decide to live in the house as your primary residence.

You could decide to sell the property and just cash out now. This isn’t a bad idea too if the market is on its way down. That way you don’t lose any money by holding on to it.

You can use sites like https://www.neighborhoodscout.com/ to see how the housing market in your neighborhood is doing right now.


5.  What if Your Saying, “I Inherited a House with a Mortgage”?

 

If your saying "I inherit a house with a mortgage" or other liens attached to the property they will have to be paid off before you can take ownership of the house. You may be in a situation where you have to remortgage inherited property.

Typically, banks will have a “due-on-sale” clause. This means the whole amount of the loan is due upon sale or transfer of ownership. The means that you will have to get a loan in your name to pay off the current mortgage.

If you are a spouse or relative, you might be eligible to assume the mortgage directly. Check with the lender to see.

If there are multiple people inheriting the same house, then you could get the loan to pay off the mortgage and then pay off each of the other people their share of the property. You could then use your share of the property as your down payment to get the loan.

Just know that the bank is going to get their money even if they have to foreclose on the house.


6.  What is House Inheritance Law?

 

The house inheritance law is going to depend on whether your state is a Community Property State or a Common-Law State.

If your state is a Community Property state, the odds are that half of the house belongs equally to each spouse. If the Will states they want to give the house to someone else they will only be allowed to give their half to someone else.

If there has been a divorce, then hopefully there was another Will created if the spouse didn’t want the divorced spouse to get half of the house otherwise there is still a chance they could get half.

If the state is a Common-Law state, then the spouse is not automatically entitled to half of the house. It will come down to the title of the house and who’s name it is in. However, the surviving spouse can still make claim to 1/3 of the property even if the Will stated not to. It will depend on the court’s ruling.

There is no legally protected right for children to inherit a house from their parent’s death. This will end up coming down to what’s in the Will. The only exception here would be if the child was born after the Will was written and the court could rule that this was a mistake to not put them in the Will.

For Grandchildren, there is also no legally protected right for them to inherit a house from their Grandparents. This will end up coming down to what’s in the Will. You could stand a chance though if the deceased did not have a Will.


7.  How to Sell Inherited House?

 

When it comes time and you decide that you want to sell inherited property then there are some extra tips that you will want to know.

First off, selling an inherited house is no different then selling any other house.  You own a house and you want to sell it.  It would be different however if the house was still in probate and it was not specifically Willed to any beneficiary.  In this case the Executor could get approval from the court to sell the house and split the money received among all the beneficiaries.

If you were the beneficiary that received the house you will want to know how much the house is worth. The odds are you will already know this because the fair market value of when you inherited the property will be the Stepped-up Basis for the house.

However, if you have waited a while after inheriting the house you may want to see if the value of the house has changed. For this you could pay $350 for an appraisal or you could use my FREE Property Value Estimator tool to determine the value of your property.

Once you know the value of your property you will need to prepare your house to be sold. I have written 12 Super Powerful Tips to Sell Your Home Fast.

One of the major difficulties you may run into when preparing the house for sale will be to remove all the clutter and de-personalize the house. The house will surely be full of memories and could surely be a very emotional trying task to complete and you may choose to put it off until later.

You do have other options as well if you don’t want to go through listing the house with an agent, decluttering and depersonalizing, making any repairs and cleaning it up. You could contact an investor who will buy your house in as-is condition and you can just walk away.

If you choose to use an investor then just understand that you will not get a full market value on your house but you will have the luxury of selling quickly and walking away stress free.

Did you get value from the this post or video? Hope so! If you are looking for an offer on your house in the next 48 hours without having to do anything then click here.

Feel free to share this post with anyone you know that is going to might be inheriting a house and would enjoy these tips on Inheriting a House and Selling It and take care!

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Oliver Carlin
oliver@oliverbuyshomes.com
(757) 563-4706

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“I teach you the different ways to buy and sell houses fast while getting the best possible deals”

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Oliver

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