Inheriting a home is often a bittersweet experience. For many, it can also feel like a burden. Maintaining or selling a home while going through the grieving process is overwhelming. Many people who inherit properties already have their own house and don’t want to live in the inherited home. But sometimes, selling the property can be a little more complicated than posting a for-sale sign in the yard.
Here are a few things you need to know about inheritance tax and how to sell an inherited property.
What are my options for an inherited property?
If you inherit a house, you have a few options. You could keep the house as your primary residence, use the home as a rental property, make improvements and sell it later, or sell the home right away. Each of these decisions could have long-term financial consequences.
Keep the house as a primary residence:
Once you inherit a home, you can move in and make it your primary residence. If there is any mortgage, you assume responsibility for making the payments. You’ll also need to pay for property insurance, HOA fees, and maintenance. You’ll need to contact the mortgage lender as quickly as possible to ensure your name is added to the loan and the title. You won’t be taxed on the house if you keep it. If the estate values more than $11.7 million, you may pay federal estate taxes.
Keep the house and rent out the property:
If you don’t want to use the home as a primary residence, you might consider using it as a real estate investment. Renting out a home to individual tenants could be profitable; however, using the property for monetary gain could require you to pay tax on the earnings. You should consult your financial advisor if you decide to rent the inherited property.
Make improvements or hold onto the house and sell later:
You might have to pay capital gains tax if you sell your home. Capital gains tax can be confusing, but you won’t have to pay the capital gains tax as long as you sell the house for equal or less than the home’s market value.
For example, if your grandfather purchased his home for $50,000, and the current market value is $400,000, you aren’t paying tax on the $350,0000 difference. Since the market value resets at the owner’s death, you won’t pay the capital gains tax if you sell the home for $400,000 or less. You only pay capital gains tax on the amount over the property value at the time of the previous owner’s death.
Sell the home immediately:
You can sell it right away if you can’t or don’t want to use the inherited property. The same rules apply for capital gains, as mentioned before. If you sell the home for market value (reset at the previous owner’s death) or less, you won’t have to pay capital gains tax.
Key considerations that could determine if you keep or sell your inherited property
Deciding about keeping or selling an inherited property might take extra consideration. Here are a few things that could help you decide whether selling the house quickly is the best option.
Is there a mortgage on the home?
If there is still a loan balance on the mortgage, the inheritor is responsible for making payments on the house. Can you afford to make the mortgage payments? Do you want to take on the financial burden?
Is there a reverse mortgage on the home?
When an owner takes out a reverse mortgage, their lender uses the equity in the house to make payments to the owner. If you inherit a home with a reverse mortgage, you’ll need to repay the loan or sell the house. The lender only gets the amount they paid in the reverse mortgage. Any earnings above the loan are yours to keep.
Do you need to consider other family members?
If you share the inheritance with other family members. In that case, you’ll need to work together to determine which option best fits the needs of everyone.
In addition to thinking about capital gains tax, you should be aware that inherited homes don’t qualify for home sale tax exemptions. Typically, if you live in a home you’ve lived in for at least two of the previous five years, you can deduct up to $250,000 in proceeds for a single homeowner and $500,000 for married owners. You cannot take advantage of this tax exemption immediately. If you live in the home for the next two to three years, you may be able to qualify for the tax exemption then.
Inherited properties come with emotional baggage and stress. If you want to move on quickly, selling your home for a cash offer can help streamline the process. At brick, we purchase homes in any condition, and we cater our service to each customer. Call today for a quick cash offer.