Selling Inherited Property? Here’s What You Need To Know
What You Will Read In This Article
An inheritance is something most people would consider a blessing — it means someone close to you is gifting you something they deem valuable. However, inheriting a property comes with a lot of extra responsibility…
- What will it cost to keep and maintain the property?
- Is the home in good condition — good enough to warrant moving in or leasing to a tenant?
- What will owning the property do for my taxes and financial situation?
These questions and unknown variables are why many people wind up selling an inherited property outright.
If you’ve been left responsible for selling an inherited property, don’t worry — you’re in the right place. This article will outline the steps you should take to sell your inherited property as smoothly as possible.
What Is An Inherited Property?
Inherited property is real estate passed down to you from another person. Inherited properties can come in many forms — a home, a piece of land, a commercial building, or an investment property. However, the most common type of inherited property is a home.
Why You Should Know How to Sell Inherited Property
Selling your primary residence (where you live) is fairly straightforward. But selling an inherited home has a few unique challenges. Here are a few you might run into:
- if you sell too quickly, you might pay more in taxes
- if you sell too slowly, you might also pay more in taxes
- other family members might not want to sell the property
- your sale price might not cover an existing mortgage
However, with the help of this guide, you can avoid (or at least prepare for) the worst scenarios that might arise with selling an inherited house.
Step-by-Step Instructions for Selling an Inherited Property
We will outline the “best practices” approach to selling an inherited property. You can follow these steps in order or address them as they come up — whatever you prefer.
- Get through the probate process
- Get heirs and executor(s) to agree to sell
- Weigh the tax implications
- List the home or go off-market
- Sell the house
It sounds simple, but the process of selling an inherited home is rarely clear-cut.
Go at your own pace, and feel free to skip steps that don’t apply to your situation.
Let’s jump in!
Step 1. The Probate Process
Simply put, probate is the period following a person’s death where an executor or administrator will use the deceased person’s assets to pay off any remaining liabilities.
Liabilities that are settled during probate include:
- existing mortgages
- credit card debt
- private loans
- delinquent taxes
As a beneficiary, you’ll want to determine if the property you’re due to inherit is paid off or if you’ll be taking over an existing mortgage. This information will help you decide how best to sell an inherited property.
Can you afford an extra mortgage, plus repair costs and utilities?
Or would it be better to sell “as-is” to a cash buyer and avoid ongoing costs?
You’ll have to consider these questions and more as you prepare to sell the home.
Note: if you’re both the executor and a beneficiary, we recommend hiring a finance professional like a CPA to help you get through the probate process quickly and efficiently.
Unless the deceased person was meticulous about finances and bookkeeping… you might be in probate for months, even years.
Sometimes, you might find it easier to sell the house in an estate sale to cover the deceased person’s liabilities.
Step 2. Getting an Agreement
You can skip this step if you’re the sole heir to the inherited property. For everyone else? — we hope you’re on good terms with your siblings.
Selling an inherited property requires consent from all parties involved — both the heirs and executor must agree to the sale.
As a new owner, it’s your job to convince the other beneficiaries to sell the property. You can do this by taking a slow approach and laying out all the variables.
Explain the tax implications of keeping the home, the costs, and the benefits (what they’d gain if they decide to sell). Be as transparent as possible about your desire to sell the home to avoid any suspicion or distrust.
Getting everyone on the same page is likely the biggest hurdle you’ll face selling an inherited property. Be patient here — take your time, and don’t try to force the sale.
Step 3. Weighing the Tax Implications
Once you have an agreement, it’s time to crunch the numbers (if you haven’t already).
The probate process should’ve churned out a “clean” property with few overhanging debts to service. But there are still taxes to think about when you look to sell an inherited home.
Here are a few taxes you might run into (though most are handled in probate):
- Federal estate tax (for assets valued over 12+ million)
- property taxes
- inheritance tax
- capital gains tax
- sometimes, even income tax
Inheritance tax and federal estate tax are largely unavoidable (but also rare), so I won’t talk in detail about them. Property taxes are almost always handled in probate and, thus, not a factor in the sales process.
That leaves the big, bad capital gains tax.
What is Capital Gains Tax
Capital gains taxes are a tax on the profits of the sale of an asset (stocks, bonds, crypto, real estate, etc.)
Let’s say you bought a new house for $100,000. Two years later, you sell that house for $150,000. The $50,000 difference is considered capital gains and would be subject to capital gains tax.
There are several ways to avoid paying capital gains tax on inherited property. But since we’ve decided to sell, that will limit our options.
Ways to Avoid (or Lessen) Capital Gains Tax
Here are two sample scenarios involving a home sale:
You can immediately sell that house for $200,000 and pay no capital gains tax.
Sample B.) You inherit the same $200,000 home but decide to hold it for a while.
If you sell it for more than $200,000 in 12 months or less: you will pay short-term capital gains tax. (Hint: this is taxed at your income tax rate.)
If you wait at least a full year (longer than 12 months) before selling: you’ll pay long-term capital gains tax.
Consider these options seriously, as a long-term capital gains tax could save you thousands compared to a short-term capital gains tax rate.
Step 4. List the home or sell it yourself
You’ve crunched your numbers and decided on a timeline to sell — now it’s time to get the house put on the market.
First, though, ask yourself these questions:
- Is the house in good shape? Could a buyer move in today and be happy?
- What are my margins? Can I make a profit or will I sell at a loss?
- How long can I afford to wait for a closing?
- Do I want to try selling the home myself?
These questions might halt you in your tracks unless you’re familiar with the home buying/selling process. You’re not alone either — most people will only go through the process once, maybe twice in their lifetimes.
When in doubt, list the home with a licensed real estate agent — you can find one here.
A good agent will do most of the “gruntwork.” They’ll do the property listing, marketing, and showing to buyers. They’ll liaise between you, the buyer, the title company, the home inspector, etc.
However, if you want to sell in a hurry, you might want to consider working 1-on-1 with a cash home buyer.
Cash home buyers are typically investors who look to buy “distressed” properties that aren’t an excellent fit for the retail market. They’re a good option if you inherit a property that needs significant repair or are interested in selling quickly for fair market value.
In the next step, we’ll highlight the most exciting part of the whole process: the sale.
Step 5. Sell the house
You’ve done the work and due diligence, and now you’re ready to get paid.
If you’ve listed your home with an agent, all that’s left to do is sit back and wait for offers to come in. Select an offer that works with your projected numbers, exposes you to the least amount of risk and greatest margins… then sign the paperwork. Easy.
If you’ve elected to sell the home yourself, you’ll need to do more footwork (marketing, hosting showings, etc.) Be honest about your reason for selling, price the home competitively, and take time to do things correctly — now is not the time for costly slip-ups.
Either way, there is a significant shortage of homes in the U.S, and it’s likely your home won’t stay on the market for too long.
Congratulations! It was a long road, but you’ve sold your inherited property!
Things to Consider When You Sell an Inherited Property
If you cannot agree with your siblings about selling the house, it might be easier to buy it from them first in probate. Don’t worry — you don’t need to have cash available for this purchase.
You can find a hard money lender offering estate funding (probate loans). These loans are collateralized against the value of your inheritance.
Alternatively, you can sell your part-ownership in the house to the other heir. Selling your share can be a good option if you don’t want to slog through the legal process or aren’t making any headway convincing the other party to sell.
How To Make the Most Profit from Selling an Inherited Property
If you want to maximize your profit from an inherited home, there are a few next-level tactics you could take…
Juggling Tax Exclusions
- If the inherited home is an upgrade to your existing home… move in. You can sell your primary residence and exclude any capital gains by $250,000 for singles and a whopping $500,000 for married couples!
- Live in the inherited home for ~3 years, and then you’ll be eligible for the tax exclusion again.
- Sell the inherited home and (again) exclude any capital gains.
- You’ve sold two homes in 3 years and avoided up to $1 million in capital gains tax.
Play the Long Game
- If your local market is experiencing a down period, or there are significant renovations needed in the house — it might benefit you to wait to sell.
- This waiting period will allow you to improve the house, wait for a more favorable market, and after 12 months, you’ll qualify for long-term capital gains tax rates.
- By waiting, you’ll be able to sell in a better market, the updates will demand a higher price point, and you’ll save money at the closing table on taxes.
Alternatives to Selling an Inherited House
Sometimes the stars don’t align, and you can’t sell the house. Or maybe you’ve changed your mind and want to explore what keeping the house might look like.
Either way, there are several alternatives to selling:
- You can move in and make it your own. This is an excellent option if you’re upgrading from a smaller home or a place you’re currently renting.
- You can rent the home to tenants. Have an interest in being a landlord? An inherited home is a low-cost way to get into the real estate investing game.
- You can disclaim the property. Don’t want the added hassle of inheriting a house? Give it to someone else.
Selling inherited property isn’t rocket science — it just involves a bit of patience and preparation.
You’re already preparing yourself by reading this article, and that’s a good start. But if you’d like to learn more, we have a wealth of free information on everything a homeowner would want to know.
Educate yourself on the entire process, A to Z, and you’ll always be the calm, collected head at the table when it comes time to sell your inherited house.