Selling Inherited Property
Selling inherited property received as an inheritance isn’t considered as income for tax purposes by the individual who inherits it. The inherited home’s adjusted basis is the fair market value at the time it passes to the heir. How long the heir holds the property before selling it determines the amount of profit on the sale and whether the sale is considered a short or long-term capital gain.
In many instances, when you add the value at the time of the home when you inherited it to the improvement costs you make to the property in order to sell it, the home’s fair market value might not substantially increase. If the sale doesn’t result in a gain, you won’t owe capital gains tax.
Selling an inherited property from a parent or loved one may be perceived as a challenging task or a generous windfall. Some heirs move into the inherited home and sell the former residence. In other instances, the heir holds an estate sell to dispose of furnishings or unnecessary items in the home before selling the property itself.
Selling Inherited Property: Lien Status
If you have concerns about selling inherited property, know whether the property has mortgages or liens that must be paid. To determine fair market value, compare similar properties in the area. You may have questions about how to calculate net profits from the sale of inherited property as well.
Step 1: Pay all outstanding taxes on the property and stay current on them
If the property was mortgaged in the past, check that it’s paid off. Verify that any outstanding bills are paid because not all inherited properties arrive free and clear.
Many heirs reach out to a real estate agent to list and sell the property. If you live out of town or if you’re concerned about getting the maximum potential sales price, hiring an experienced realtor makes good financial sense.
Step 2: Contact a Realtor
Ask friends and family for referrals. If you live in another city and work with a local realtor, he or she may have network resources to identify a real estate agent. Ask the new realtor to appraise and deduct probable expenses from the property’s potential sales price:
- Include mortgage payments if any
- Homeowner insurance policies
- Appraisal fees, real estate costs and fees
- Inspection fees, and
- All other expenses related to sale of the inherited property
For example, you might want to sell heavy antique furniture and replace it with modern staged furnishings. Include the cost of staging in your estimated costs. This step provides a better idea of how much money you’ll realize following the sale of the inherited property.
Discuss the list price with the realtor. Tell him or her the lowest offer you’re willing to accept.
Step 3: Plan an Auction or Estate Sale
An auction or estate sale can reduce the time you’re responsible for maintenance costs of the inherited home. An auction or estate sale can reduce the amount of time between learning about the inherited property and liquidating it. Alternatively:
- Find a cash buyer. You probably won’t get as much for the property but you may sell it quickly. According to the National Association of Mortgage Professionals, cash buyers typically expect to pay 80 percent of the property’s fair market value.
- Discuss selling your property with a tax advisor or attorney before signing legal documents and contracts. You must know the tax consequences of selling inherited property, if any, before going forward.
- The property’s stepped-up value, or its value at the time the prior owner died, may allow for a smaller taxable gain when the property is liquidated. Appreciation of the property’s value in the decedent’s life is considered forgiven. This helps adult children avoid paying a large amount of taxes on a deceased relation’s appreciated property value.
- If the inherited property declined in market value since it was passed on to you, it may be possible to take a loss deduction for tax purposes.
Other Tax Concerns
Tax laws vary between the states. The following comments should be considered as a general guide to tax implications involved in selling inherited property:
- Inherited property doesn’t qualify for the tax exclusion. In most cases, when you sell property in which you’ve lived for at least two of the prior five years, it’s possible to take advantage of the home sale tax exclusion. This means up to $250,000 the sale proceeds are considered tax-free to the single owner. Married couples may avoid paying tax on a maximum of $500,000 in proceeds. If you don’t plan to live in the inherited property for a minimum two year period, you won’t qualify for this tax exclusion.
- Know how and where to report proceeds after selling inherited property. IRS says that those selling inherited property must report proceeds. The actual taxable amount is calculated on the basis of the property’s fair market value and improvements made to the property by the heir. Use Form 706 (United States Estate and Generation-Skipping Transfer) to report the sale on your annual tax return.
- If you aren’t required to pay tax after selling inherited property, you must report the event to IRS.
There are differences between estate tax and inheritance tax. Some differences occur among the individual states. Tax law is a complex topic, so it’s always best to seek advice from an experienced attorney or accountant to discuss the nuances relating to financial obligations that arrive with selling inherited property.