Probate process l Capital gains taxes l Inheritance and estate taxes l Selling an inherited house l Options for selling
Inheriting a home can be a financial windfall, but selling an inherited property can be a long and tricky process with lots of legal hoops to jump through along the way.
Selling might not be your best option given the tax breaks that are available to inheritors who choose to retain ownership of a property.
Before you decide to sell, it’s important to understand the costs and tax implications that you might be facing, as well as the best methods for selling an inherited home.
Key Takeaways:
- An inherited home must go through a legal process known as probate before the home can be sold. It can take an average of 9-24 months.
- Inheritors pay capital gains tax based on the home’s fair market value at the time of the original owner’s death. This is called a “stepped-up basis,” and it means that the capital gains calculation does not consider the home’s value at the time the deceased owner acquired it.
- Depending on your state’s tax laws and the value of your inherited estate, you likely won’t have to pay inheritance or estate taxes.
The Probate Process
An inherited property has to pass through a legal process called probate before it can be sold. Probate can take anywhere from 9-24 months as the court validates the deceased person’s will.
Until the will has been validated, all of the assets named within it — including the house — can’t be sold.
Once the will has been approved, the executor of the will is allowed to act on the wishes of the deceased.
What about 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 is transferred.
However, if there’s a “due on sale” clause, the inheritor is expected to pay the balance of the mortgage 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.
If you weren’t anticipating having this debt when you inherited the home, you may want to sell right away in order to cover the mortgage and cash in on any equity that exists in the home.
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.
But there’s even better news.
Because capital gains taxes on inherited properties have a “stepped-up basis,” the amount that you’ll pay if you sell shortly after inheriting the property is minimal.
A “stepped-up basis” means that the gain is calculated using the fair market value at the time of the original owner’s death.
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 though the original owner may have only paid $150,000 in the past.
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 $75,000 gain that the original owner may be subject to if they were still alive.
State capital gains tax
State capital gains tax may also apply, but it depends on where you live and how your state’s laws work. Contact your state’s tax department for more information.
Long-term capital gains
Inherited houses are only subject to long term capital gains, which are taxed at 0%, 15%, or 20%, depending on your tax bracket.
Ordinarily assets like houses are subject to short-term capital gains if they’re sold within one year of acquiring them, or long-term capital gains if the asset is sold after a full year of ownership.
An inherited property is considered to be held for over one year — regardless of how long it’s actually been held. This means that short term capital gains tax is never applicable.
| Tax rate | Single | Married, filing jointly | Married, filing seperately | Head of Household |
|---|---|---|---|---|
| 0% | $0-$40,000 | $0-$80,000 | $0-$40,000 | $0-$53,600 |
| 15% | $40,001-$441,450 | $80,001-$496,600 | $40,001-$248,300 | $53,601-$469,050 |
| 20% | $441,451 or more | $496,601 or more | $248,301 or more | $469,051 or more |
For example, say someone sells a home that had a fair market value of $250,000 at the time they inherited it, but they end up selling the house for $275,000.
This seller is single and has an annual income of $50,000, so their federal capital gains tax will be taxed 15%. They had a capital gain of $25,000 ($275,000 – $250,000 = $25,000), so their tax would amount to $3,750.
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.
The exclusion allows people to exclude up to $250,000 of the gain from their income, or up to $500,000 if they file a joint return with their spouse.
There are just 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-year period before the sale.
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.
In 2021, the federal estate tax threshold is $11.7 million, so obviously all but the wealthiest taxpayers will be exempt.
On the state level, only twelve 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?
If you inherit a home, you aren’t required to sell it. You could hold onto it and sell at a later date, but you’ll still have to pay upkeep costs while you own the home.
Ultimately, the best choice depends on your situation and financial goals.
| Reasons to sell your inherited home now | Reasons to sell your inherited home later |
|---|---|
| No upkeep or maintenance to worry about | You can time your sale to get the most possible value in a seller's market. |
| Get access to equity in your home and use the cash for whatever you want. | More time to prep and repair the home. |
| Living in the home for two years could entitle you to a capital gains tax exclusion. |
Reasons to sell your inherited home now
- No upkeep or maintenance: It’s no secret that owning a home costs hundreds of dollars each month when you have to pay for 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 right away, you’ll have access to 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 aren’t strong, you might make more money if you wait for the market conditions to improve. Ideally, you’ll sell in a seller’s market where the demand for homes exceeds supply and buyers are willing to pay a premium to obtain a home.
- More time to prep the home for sale: Taking the time to clean out the house and make minor improvements might give you the opportunity to net more money for the home when you’re ready to list it on the open market.
- Tax breaks: Living in the home for two years could make you eligible for the capital gains tax exclusion. On the other hand, if you don’t want to live in house, you could sell and benefit from minimal capital gains charges when you sell due to the “stepped up basis” — meaning the gain is calculated by subtracting the home’s fair market value (at the time you inherited it) from the sale price.
How Should You Sell Your Home?
The best method for selling your home depends on what your priorities are, either selling for the most possible money, 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
Sellers who want to get the most cash for their homes should consider either listing with a real estate agent or selling their inherited home themselves.
Either of these options will allow the owner to capitalize on the open market and attract buyers who will pay a good price.
- List with an agent: An agent 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. Our friends at Clever can connect you with a top agent in your area today!
- For sale by owner (FSBO): If you sell your inherited property yourself, you won’t have to pay a listing agent. However, 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 in the end 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: Cash buyers are typically investors who buy homes at a reduced price so they can resell them for a profit. This could be a good option for sellers who don’t care about getting top dollar for their home, or sellers who have a distressed property that they don’t want to put money into.
- iBuyers: iBuyers only operate in select markets, but they 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.
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