As the baby boomer and older generations age, many adult children are dealing with important decisions regarding real estate they have inherited. Inheriting real estate can be a challenging situation. You may not be familiar with the property or real estate in general and also the property may be located far from where you live. There are also a number of different legal ways that a property can be inherited, so understanding the differences and what actions are needed is important. Due to the complexity of inheriting a property, it is a good idea to have an attorney help with the process. In many cases, an attorney or the court may even be required.
- Can I Sell My Inherited Home?
- Are There Alternatives to Selling?
- What Happens If The Property Is Occupied By a Tenant?
- Additional considerations
- What Happens If The At Risk For Foreclosure?
- What If I Live in a Different State?
- How To Sell An Inherited House
- What To Do With the Contents?
- What Happens If All Owners Are Not In Agreement?
- What Does A Traditional Listing Agent Process Look Like?
- What Does An iBuyer Process Look Like?
- What Does A Cash Offer Process Look Like?
- What Documents Do I Need To Sell My Home?
- What Happens To The Mortgage After The Sale?
- Are There Additional Taxes When Selling Inherited Property?
Can I Sell My Inherited Home?
Does The Property Need To Go Through Probate?
Each state has its own probate laws and regulations. The threshold for needing probate, for example, can vary significantly from state to state. There is typically a price limit and if the value of the property exceeds that, and no other trust or method of inheritance is available, then probate is required.
How the property was held on title plays an important role. If the deceased person solely owned the property, it will likely go through probate unless specific exceptions apply. However, if the property was jointly owned (e.g., with a spouse) with what's called "right of survivorship," the surviving owner automatically inherits it without probate.
Having a will can bypass probate for some inherited properties. If the will clearly and validly designates beneficiaries for specific assets, including real estate, probate might not be needed for those items. Similarly, if the deceased established a living trust and titled the property within the trust, it often avoids probate.
Remember, every situation is unique, and navigating the legal aspects of inheritance can be complex. Seeking professional advice from a qualified attorney is always recommended in these situations.
Know Where the Mortgage Stands
Understanding the mortgage balance and terms as well as any additional liens placed on the property is important. Even though the owner is deceased, the mortgage and other liens are secured by the property and any creditors are entitled to be paid.
There are a number of factors to consider regarding mortgage or any other liens. One consideration is the ownership structure. With sole ownership, if the deceased solely owned the house with a traditional mortgage, the outstanding loan balance generally becomes part of their estate. The executor or administrator of the estate will need to decide how to handle the mortgage. Those choices are to:
- Sell the house: The proceeds from the sale would be used to pay off the mortgage, with any remaining funds distributed as part of the inheritance.
- Refinance the mortgage: This option may allow surviving family members to keep the house if they qualify for a new loan.
- Assume the mortgage: In some cases, a family member or heir may be able to take over the existing mortgage payments and responsibility for the property.
With joint ownership with right of survivorship: If the deceased co-owned the house with a spouse or partner with right of survivorship, the surviving owner automatically inherits the full ownership along with the mortgage debt.
If there is a will or trust in place, it may specify how the house and mortgage should be handled. Probate may be avoided if terms for the transfer of ownership are outlined in the trust document
It's important to remember that specific legal and financial procedures will apply depending on the circumstances. Here are some helpful resources to understand your situation better:
- Consult with a probate attorney: An attorney specializing in estate law can advise on the legal aspects of handling the mortgage and property within your specific state's guidelines.
- Contact the mortgage lender: The lender can provide information about the specific terms of the mortgage and any options available for the surviving family members.
Are there alternatives to selling?
When you inherit a property, the first question you ask yourself is “What am I going to do with it?” This decision gets more complex if there are multiple heirs that all have to agree. In many cases, selling the property and evenly distributing the proceeds is the most amicable and fair way to deal with it. However, if you are the sole heir or have other heirs that are flexible and cooperative, there are other options.
You may consider keeping the property and renting it out for income. This choice could provide the heirs with life long income and an asset that may continue to appreciate. This option comes with a number of variables to consider. The property may not be in suitable condition to rent, so a costly renovation may be required. If this is the case, the heirs must have the money to finance the repairs and renovation and take the time and effort necessary to manage it. Also, being a landlord comes with a number of responsibilities including leasing contracts, rent collection, evictions and responding to maintenance issues. A property management company can assist with most of these, but their cost will eat into some of your income.
Another consideration is to move into the property and use it as your primary residence. The inherited property may be in a location or have characteristics that are more desirable than your current living situation. If you are the sole heir, this can be a relatively simple process. Again, there may be repairs and renovations that are needed prior to moving in that will need to be paid for. Also, if there is a mortgage, it may need to be refinanced. This can be a great option to improve your living situation. If there are multiple heirs, this can be more complicated. The one that wants to move into the property will have to buy out the other heirs. There is financing to consider and all the heirs will have to agree to the plan and agree to the property valuation.
What Happens if The Property is Occupied by a Tenant?
Inheriting a property with existing tenants comes with its own set of considerations and responsibilities. You may elect to become a landlord, sell the property with the tenants in place or sell the property and negotiate with the tenants to vacate.
If you become a landlord, it is important to review the existing lease agreement, introduce yourself to the tenants and explain the change of ownership, update lease records and payment history and make sure to comply with tenant-landlord laws.
If you sell the property with tenants in place, this needs to be disclosed to buyers in the listing. The buyer in this situation will likely be a seasoned investor and you may not get as high of a selling price as you would if it was sold vacant and renovated.
By negotiating with the tenants to vacate the property, you may be able to end the lease early, so that you can renovate and repair the property, then list it for sale and maximize the potential selling price. Many times part of this negotiation involves paying the tenant a buyout amount. You will need to determine if this amount is worth the extra that you anticipate getting with a sale.
Some other things to consider when renting out an inherited property:
- Respect existing lease agreements: The terms of the existing lease are legally binding for both you and the tenants. You cannot change them without proper notice and negotiation.
- Maintain the property: You are responsible for repairs and maintenance as outlined in the lease agreement and local landlord-tenant laws.
- Collect rent: Implement a system for rent collection and communication with the tenants.
- Set clear expectations: Communicate openly and transparently with the tenants about your expectations and their rights.
- Seek professional help: Consult with a real estate agent or property manager if you need assistance with tenant management or the selling process.
Additional Resources:
- Nolo website
- National Apartment Association
- Your local tenant-landlord agency can provide information about specific laws and regulations in your area.
Inheriting a property with tenants can be a rewarding experience, but it also comes with responsibilities. With proper knowledge and preparation, you can navigate the situation smoothly and ensure a positive experience for both you and the tenants.
What Happens if the Property is at Risk for Foreclosure?
If you inherit a property that is in or at risk of foreclosure, time is of the essence. Immediately contact the lender and get information about the outstanding balance, stage of foreclosure and ask about any options available. Even though the person who took out the mortgage may be deceased, the lender still has rights to foreclose if payments are not made.
Also, it is important that all heirs are kept informed about the status of the foreclosure and decisions that are being made. Tax consequences and potential repairs and renovations that may be necessary are important factors to be considered as well.
What if I live in a different state?
If you live in a different state or even within the same state, but a far distance from the inherited property, it can present a number of challenges. This situation will often make selling the property the best decision. Documentation needed to prepare the home for sale and the change of ownership can usually be completed online without the need to be present in the city the property is located in. Some documents, including the deed and other legal forms, will need to be signed in the presence of a notary public. This can often be done with a mobile notary that lives in your area. There will likely need to be several trips to the property prior to selling it though. You must assess the current condition of the home and manage any repairs that are needed and also determine what to do with any personal property that has been left behind. In many cases, heirs will stay in the city where the property is located for a few weeks to a few months in order to address what needs to be done prior to selling the property.
How To Sell An Inherited House
What To Do With The Contents?
Inheriting a house full of belongings can be overwhelming, but with some planning and thought, you can navigate the process smoothly.
Create a complete inventory of everything in the house. This will help you assess the value, sentimental significance and condition of each item. Take photos or videos of the inventory for documentation purposes. Then categorize the items into things you want to keep, sell, donate or throw away.
You may want to begin by sorting through the belongings with sentimental value first. Decide which items hold the most meaning for you and your family and set them aside to keep. It’s important to keep all heirs involved in this process as some items may have sentimental value to some more than others.
For items that will be sold, you may consider using an estate sale service. They will conduct an inventory, price the items and hold the sale. You will receive the proceeds, less a percentage for the cost of their service.
For items that are to be donated, some local charities, like the Salvation Army or Goodwill will offer a service to come to the property and pick up the items. If you are unable to find one that will do this, you may need to make arrangements to drop the items off.
There may be a lot of trash or property that will be left. If you have the means, transportation and help, a few runs to the local dump can solve the problem. Otherwise, there are junk removal services that can do it for you.
What Happens If All Owners Are Not In Agreement?
Disagreements among heirs about an inherited property are common. Managing them requires open communication, understanding, and sometimes, legal guidance. Here are some potential scenarios and options to consider:
Reaching Agreement:
- Open communication: Encourage discussions among all heirs to understand individual preferences, concerns, and priorities.
- Compromise: Explore options that meet the needs of multiple parties, like partial buyouts, phased selling, or shared ownership with defined usage arrangements.
- Mediation: Seek the help of a neutral mediator to facilitate communication, guide negotiations, and help reach a mutually agreeable solution.
Formal Options:
- Partition action: This legal process, initiated by one or more heirs, forces the sale of the property and division of the proceeds among the heirs according to their inheritance shares.
- Buy-out: One heir can offer to buy out the shares of others, granting them sole ownership. This requires agreement from all willing to sell and fair negotiation of the buyout price.
- Living trust: If the deceased established a living trust with clear instructions regarding the property, it might supersede disagreements and dictate the course of action.
Consult a lawyer specializing in probate and estate law to understand legal options, implications of different choices, and potential costs.
A Financial advisor can provide guidance on financial implications of various options, including taxes, mortgage obligations, and potential property value.
What Would a Traditional Listing Agent Process Look Like?
If you choose to sell your inherited property with a traditional listing, you will first need to choose a local listing agent. You should meet with them to discuss the condition, repairs needed and discuss a listing price. If you decide to make repairs and renovations prior to listing the property, it is important to make sure work is done by licensed professionals. When the property is ready to list, you will sign a listing agreement with the selling price and commission to be paid. The real estate agent will take photos and prepare other marketing materials and then list the home on the MLS. Since the property will likely be vacant, showings and open houses will be easy to schedule. Often the agent will install a lockbox on the property, so other agents can access the keys. If a buyer makes an offer and you accept it, then there is an escrow period where inspections and appraisals are completed and title ensures that all the inheritance documentation has been properly executed. The buyer may ask for repairs or a credit for repairs if their inspection reveals issues with the property during the contingency period. If you agree, the sale will move forward toward closing. If you do not agree, the buyer may cancel and you will have to start the process over with a new buyer. Once all the terms and paperwork has been completed, the sale will close and proceeds will be distributed.
What Does An iBuyer Process Look Like?
Some sellers will choose to sell to an ibuyer, rather than on the open market. This eliminates the need for repairs, renovations, showings, open houses and buyer cancellations. Most ibuyers will still conduct an inspection and will likely ask for a credit for repairs if the inspection identifies problems with the property. Additionally, when selling to an ibuyer, there are still fees and commissions that are paid. You will likely receive a price lower than if you listed the property on the open market in exchange for the convenience.
What Does A Cash Offer Process Look Like?
Selling to an investor or cash buyer like Haven Homebuyers offers similar conveniences to an ibuyer. At Haven Homebuyers though, we will complete a walk through, then make a firm offer. There are no agent fees or commissions and we will not ask for any repairs to be made or a price reduction for repairs. Additionally, we will pay the sellers closing costs. Once the walkthrough is completed and the price is agreed, a purchase agreement will be signed by all parties and an escrow process will be completed similarly to a traditional sale.
What Documents Do I Need to Sell My Home?
It is important to keep detailed records and have any required documents accessible as you begin the journey to sell an inherited property. If there was a living trust, you will need the full trust document. The trust will spell out the terms and conditions of the inheritance. It will almost always be necessary to use an attorney for this process.
If there was no living trust, other documents that may be necessary are the will, probate documents and death certificate. If the inheritance is structured as a transfer on death deed, the deed will need to be prepared by an attorney or paralegal, notarized, then recorded with the county recorder’s office.
What Happens To The Mortgage After The Sale?
After the sale, any outstanding mortgage balance or other liens on the property will be paid off directly to the mortgage company or lienholder. The net proceeds after those are paid off and any closing costs or commissions are paid will be distributed to the heirs.
Are There Additional Taxes When Selling Inherited Property?
When Inheriting a property it’s crucial to understand the potential tax implications involved. Here's a breakdown of the key tax considerations when inheriting property:
1. Capital Gains Tax:
- Generally, you won't owe taxes on the inherited property itself. However, if you decide to sell it later, you might be subject to capital gains tax on the profit earned.
- This tax is calculated based on the difference between the property's "basis" (typically its fair market value at the time of inheritance) and the selling price.
- The good news is that inherited property receives a significant tax advantage through a concept called "stepped-up basis." This means the basis resets to the fair market value at the date of inheritance, eliminating any potential capital gains tax liability from the original owner's purchase price.
2. Income Taxes on Rental Income:
- If you choose to rent out the inherited property, the rental income you receive will be considered taxable income.
- You'll need to report this income on your tax return and pay taxes on it at your regular income tax rate.
- You can, however, deduct certain expenses associated with owning and renting the property, such as repairs, maintenance, mortgage interest, and property taxes, to reduce your taxable income.
3. Estate Tax:
- The federal estate tax only applies to estates exceeding a certain threshold, currently set at $12.9 million per individual in 2023. If the inherited property pushes your estate above this threshold, you may be liable for estate taxes.
- However, most inherited properties fall well below this threshold and are exempt from estate taxes.
- Some states have their own estate taxes with lower thresholds, so it's crucial to check your state's specific rules.
4. Property Taxes:
- You'll be responsible for paying property taxes on the inherited property to your local government.
- The amount of property tax you owe will vary depending on the property's location, assessed value, and local tax rates.
5. Basis Adjustments:
- In certain situations, the basis of the inherited property may need to be adjusted. This can happen if, for example, the property was depreciated for tax purposes by the deceased owner.
- Consulting with a tax advisor can help you determine if any basis adjustments are necessary and how they might affect your potential capital gains tax liability.
Remember, navigating the tax complexities of inheriting property can be challenging. Seeking professional guidance from a qualified tax advisor is highly recommended to ensure you understand your specific situation, comply with all relevant tax regulations, and minimize your tax burden.
Here are some additional resources that you may find helpful:
- IRS Publication 550, Investment Income and Expenses
- IRS Publication 946, How to Depreciate Property
- National Association of Realtors®
By understanding the potential tax implications and seeking professional guidance when needed, you can ensure a smooth and financially sound transition as you inherit and manage your newly acquired property.
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