Selling an Inherited Home: How to Sell Fast and Avoid Taxes

Probate process l Capital gains taxes l Inheritance and estate taxes l Should you sell? l Ways to sell an inherited house | FAQs

Selling an inherited home can provide you with a source of sudden wealth – but it can also be a long and tricky process with lots of legal risks and tax implications to consider. 

In most cases, the inherited house must go through a probate process (nine to 24-month period) before you can sell it.  Once passed on, you take over ownership of the property and can live in the house, rent it out, or sell the inherited property.

For some, selling an inherited home fast is the most appealing choice. It can result in financial gain and eliminate the costs associated with owning the home, such as repairs and maintenance. 

But you must understand the costs of selling an inherited home, how to avoid or reduce taxes, and your best options for selling, before proceeding. We recommend consulting with a real estate professional for more specific advice on your inherited property.

Clever Real Estate can match you with a local realtor, who can provide their expert opinion of what your inherited property is worth and walk you through your options. Get matched with a top local agent today!

The probate process for inherited homes

An inherited property has to pass through a legal process called probate before you can sell it. Probate can take anywhere from nine to 24 months as the court validates the deceased person’s will.

All assets in the will — including the house — can’t be sold until the will is validated. Once approved, the executor of the will is allowed to act on the wishes of the deceased.

Inheriting mortgage debt

It’s the executor’s job to pay all outstanding debts — including mortgages — in the deceased person’s name before distributing what’s left of the estate.

Sometimes the will might specify that the inheritor is to be granted the home “free-and-clear,” which means that the executor is to use funds from the estate to pay off the remaining mortgage debt before ownership transfers. 

If there’s a “due on sale” clause, the inheritor is expected to pay the mortgage balance as soon as they gain ownership of the property.

If the proceeds from the estate won’t cover the mortgage debt, the will might also request that the inheritor assumes the mortgage in his or her name.

Paying off an inherited mortgage

If you don’t want to have mortgage debt after inheriting a home, you may want to sell right away to cover the mortgage and cash in on any equity that exists in the home.

The fastest way to sell is to find a local cash buyer or real estate investor who buys the property in as-is condition without listing it on the open market.

Our friends at Clever Real Estate can help you find a qualified buyer with Clever Offers. You’ll get offers from local cash buyers and a free home valuation from a local expert so you know what the home is really worth before selling.

Capital gains taxes on an inherited home

The good news is that you only have to worry about capital gains tax on an inherited home when you sell it. Inherited houses are only subject to long-term capital gains, taxed at 0%, 15%, or 20%, depending on your tax bracket.

Assets like houses are usually subject to short-term capital gains when sold before owning them for one year, or long-term capital gains if sold after a full year of ownership.

But an inherited property is considered to be held for over one year — regardless of how long you’ve actually owned it. This means that the higher short-term capital gains tax is never applicable.

Capital gains tax exclusion

Owners who choose to move into an inherited home and sell later are sometimes eligible for a capital gains tax exclusion.

You can exclude $250,000 of the gain on the home sale or up to $500,000 if you file a joint return with your spouse.

There are two conditions to qualify for a capital gains tax exclusion:

• The home must have been used as a primary residence for at least two out of the last five years.
• The capital gains tax exclusion hasn’t been used on another residence in the two years before the sale.

» READ: How Do I Avoid Capital Gains Tax When Selling a House?

Stepped-up basis 

But there’s even better news. Because capital gains taxes on inherited properties have a “stepped-up basis,” your potential tax bill is reduced. 

A “stepped-up basis” means that the gain is calculated using the fair market value at the time of the original owner’s death – not when they bought the property. 

In other words, if the home was worth $200,000 when the owner died, that’s what the IRS says it was worth when you first acquired it – even if the original owner paid $100,000 for the home. 

What that means is that if you, the inheritor, manage to sell the home for $225,000, you only have a taxable gain of $25,000 – not the $125,000 gain that the original owner may be subject to if they were still alive.

Inheritance and estate taxes

Most people who inherit a home won’t have to pay inheritance or estate taxes since these taxes are limited to a handful of states.

Inheritance tax

Only six states have inheritance tax laws:

• Iowa
• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

Most of these states exempt the deceased’s spouse and children — meaning that any assets that go to them aren’t subject to inheritance tax.

Estate tax

Only high-value estates have to pay federal and state estate taxes — taxes that apply to the entire value of a person’s assets after their death.

The federal estate tax threshold was $12.06 million in 2022 and rises to $12.92 million in 2023, so all but the wealthiest taxpayers are exempt.

On the state level, only 12 states and the District of Columbia charge an estate tax. The exemption for all of these states is over $1 million.

Should you sell your inherited home?

You don’t need to sell an inherited home. You could hold onto it and sell it later, but you’ll still have to pay upkeep costs.

Ultimately, the best choice depends on your situation and financial goals.

Reasons to sell your inherited home now

No upkeep or maintenance. Homeownership costs hundreds of dollars each month due to utility bills, property taxes, and repairs.  Selling the home quickly to a cash buyer or a traditional buyer could help you save money in the long run.

Get access to money from the home sale right away. If you sell the home you can access those funds to invest, pay off debt, or even buy a new home.

Reasons to wait to sell your inherited home

Time your sale to get the most value for your home. If home prices in your area are weak, you might make more money if you wait for market conditions to improve. It’s best to list a home in a seller’s market where the demand for homes exceeds supply and buyers are willing to pay a premium. 

More time to prep the home for sale. Taking the time to clean out the house and make minor improvements might allow you to make more money when you’re ready to list the home on the open market. 

Potential tax breaks. Living in the home for two years could make you eligible for the capital gains tax exclusion. You can pay lower capital gains taxes due to the “stepped-up basis” — meaning the gain is calculated by subtracting the home’s fair market value (at the time of inheritance) from the sale price.

How should you sell your inherited home?

Your best selling option depends on your priorities: Either selling for the highest possible amount or selling your inherited home fast.

Our friends at Clever can talk you through your options and help you find an agent who can get you the most money for your home without sacrificing speed.

Selling for the most money

If your goal is to get the most cash for your inherited home, consider either listing with a real estate agent or selling it yourself. 

Either of these options will allow you to capitalize on the open market and attract buyers who will pay a good price.

List with an agent. A realtor can get you the most possible money for your home using their expertise to market to potential buyers through the MLS and other real estate networks. An agent can also provide you with advice when you start receiving offers.

For sale by owner (FSBO). If you sell your inherited property yourself, you won’t have to pay a listing agent. But when you sell FSBO, you have to take care of all of the marketing and closing details yourself. You might save on initial costs, but it’s possible that you won’t be able to sell the house for as much as an agent could.

Sell your home fast

Sellers who have inherited a home can turn to a cash buyer or iBuyer if they want to sell in as little as two weeks.

Cash buyers. You can sell to companies that buy houses for cash or local real estate investors. This could be a good option if you value speed over getting top dollar for the home or for a distressed property that would cost thousands to fix up to sell. Connect with cash buyers today!

iBuyers. iBuyers only operate in select markets but pay close to fair market value for homes. An iBuyer can close on your timeline — often in two weeks or less, and they’ll take care of the entire transaction.

FAQs

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