Inheriting a house or other property can be a complicated process. In most cases, a house needs to pass through probate before it can be passed onto a new owner. Small estates (those worth less than a certain amount) don’t always go through probate but estate’s that include real estate will most likely need to.
Once it’s passed on, the house’s new owner will take over any existing mortgage and maintenance. They also have the option of selling the house, which can result in a big windfall in addition to a big tax bill. When inheriting a house, especially if you want to sell it, there are some important considerations to take so you can avoid possible issues later on.
Yes, you can sell inherited property and houses. The process of selling a house that you inherit is mostly the same as selling a house that you bought yourself. You can sell the house to investors or enlist a power buyer to help sell your home.
There may be different tax implications for an inherited house (more on taxes in a later section), so that may influence when you decide to sell. The house may also require extra attention before selling, whether that means cleaning it out or removing liens that are on the house. Repairs may also be necessary, especially if the previous homeowner couldn’t actively maintain the house.
When you inherit a house or other property, the exact process depends on where you live and the value of the decedent’s (deceased person’s) estate. Commonly, the house will need to pass through probate before you can receive it as an inheritance. (This can be true even when you inherit a house that is paid off, depending on state law.) In certain cases, the home may transfer ownership through a transfer-on-death deed or according to the rules of a trust instead.
When someone dies, everything they own becomes part of their estate. The estate may go through probate, which is the legal process for passing on someone’s property, money, and other assets, after they die. During the probate process, the person overseeing the estate - the executor or the personal representative - will handle all of the paperwork, make sure the estate’s debts are paid, handle any tax returns the estate must pay, and ultimately make sure the estate’s property and assets are transferred to the proper beneficiaries. Depending on the size and complexity of the estate, probate could take months or even years. If there are disputes over who will inherit a decedent’s assets, probate can take longer and cost more.
Once someone inherits the house, the title is transferred into their name and they become the new owners of the house. All responsibility for home maintenance and debts, including the mortgage if the inherited property is not paid off, will shift to the new owner. It’s also possible for a house to pass to multiple people.
Importantly, debts that an estate has must be paid during probate and before the estate is passed on to any heirs. In some cases, paying off debts will require the estate’s personal representative to sell property in order to raise enough to pay off debts. If a house is sold during probate, it will not transfer to the intended heirs. Any necessary taxes will be handled on the estate’s income tax returns. Mortgages on inherited houses generally do not need to be paid off during probate.
A transfer-on-death deed allows ownership of a house to pass to someone without the house having to pass through probate. These types of deeds can significantly speed up the process of changing ownership, but only about half of states allow this type of deed.
If someone has placed their house in a living trust or any other kind of trust, the house can be passed on without having to go through probate. Even if the rest of the estate passes through the probate process, property in the trust will be handled according to the trust’s instructions.
You have three main options for what to do with an inherited house. You can keep the house to live in, sell it, or rent it out.
Keeping and living in an inherited home is generally the simplest option. You don’t usually have to worry about additional taxes if you inherit a house and live in it. (You also don't have to worry about the due-on-sale clause.) But living arrangements could become complicated if you inherit a property with multiple others and not everyone agrees on who should live in the house.
Selling an inherited house could result in a big financial gain, but there are multiple financial considerations to take before selling. For example, an inherited house with a lien could require you to pay off debts before selling. Selling could also require you to pay capital gains tax, though living in the house for a couple of years before selling could help you avoid it. A house that you inherited with other people also requires you to be in agreement with them on what to do.
(If you're thinking of selling, consider working with Orchard. Our agents can help sell your home for top-dollar. Get started with a free home valuation.)
Renting out inherited property will require some planning on your part, but it may be easier than selling in some cases, and it can bring in passive income. Renting may also be an option if you already have your own house or primary residence and need help paying the mortgage on the inherited house. If you decide to rent, you may have to get landlord insurance for the property.
Inheriting a house with other people, such as your siblings or family members, can complicate future sales, but the house can still be sold.
The easiest situation with split ownership is to have all owners agree on how to proceed. Communication and planning are vital because a lot of work will need to be done before selling. Everything in the house will need to be cleaned out and throwing out the possessions of a loved one can be difficult or contentious.
Having one owner serve as the point person for the sale may help simplify the process. Otherwise, common steps in the home sale process — like choosing and working with a real estate agent, planning around open houses, and scheduling inspections — could take serious time and coordination if everyone wants to be involved.
If a house passes to multiple heirs and the majority agree to sell but some don’t want to sell, it is possible to force the sale of the house. The owners who want to sell will need to file a kind of lawsuit known as a partition action, likely through the local probate court. The court can then allow the sale if the majority of owners agree. Proceeds from the sale will be divided among the heirs.
If the house has already passed through probate and the new owners don’t decide until years later that they want to sell, the process of forcing the sale is the same, except that it won’t go through the probate court.
Most people don’t need to pay any taxes at the time that they inherit a house or other property. However, certain people will need to pay inheritance tax. It may also help to understand estate tax or gift tax in certain instances because they could affect what you inherit or whether something qualifies as an inheritance.
Inheritance tax applies to the value of your inherited property, but there is no federal inheritance tax. It is a state-level tax, and only six states have it: Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania.
Inheritance tax rates vary by state but can be as high as 18%. A surviving spouse is always exempt from inheritance tax, and many other family members are either exempt or pay a reduced rate. Check with your state tax department to see who’s exempt and the exact rates you’ll pay.
People who inherit property do not need to pay estate tax. Only the estate of the deceased ever pays estate tax, and it basically only applies to very wealthy estates that are worth at least $12.060 million in 2022. However, there are cases when an estate owes taxes or other debts that it cannot pay off, and some of the estate’s property must be sold to pay off those debts. In that case, property sold to pay off the estate’s debts cannot then be passed on, meaning people who expect to inherit that property won’t get it.
Any time someone gives you property before they die, gift tax is involved instead of inheritance tax. Even if the person who gifted you the property passes away shortly after, as long as your name is on the title before they die, the property is not an inheritance. Only the person gifting the property ever needs to report it to the IRS or pay gift tax (though most people still don’t have to actually pay the gift tax).
You do not need to report gifts that you receive to the IRS, but make sure you know your basis in the property because it could affect capital gains tax, which we discuss in the next section. For more questions about whether or not you're responsible for gift tax, reach out to a tax professional.
If you inherit a house or other property and then sell it, any money you make off that sale could be subject to income tax, and specifically capital gains tax. But even then, you may not always have to pay taxes. Whether or not you pay capital gains tax for selling an inherited house depends on the house’s fair market value (FMV), your basis in the house, and whether you qualify for the home sale exclusion.
Fair market value is the value of a house if you were to sell it on the open market. On an inherited house, FMV is the value of the house on the date of its previous owner’s death. In tax terms, that fair market value becomes your tax basis in the house and you only pay capital gains tax if you then sell the house for more than your basis. As an example, if your basis in a house is $300,000 and you sell it for $400,00, then only $100,000 of that sale is subject to capital gains tax.
Note that other kinds of inheritance, like stocks, have different rules and your basis is usually the value of the asset when the decedent bought it. Property is unique because it currently receives a stepped up basis, which is what it’s called when your tax basis becomes the FMV at time of death instead of you having the original basis. The Biden Administration has proposed eliminating stepped up basis in 2022, but no changes have become law yet.
You pay capital gains tax right on your annual income tax return. If your state has an income tax, you may need to pay both federal and state capital gains tax.
Some or all of your gains from selling a house may be exempt from capital gains tax if you qualify for the home sale exclusion, officially called the Section 121 exclusion. The home sale exclusion prevents the first $500,000 of gain from a home sale from being taxed if you file taxes jointly as a married couple, and $250,000 if you file as single or head of household.
To qualify, you need to live in the house as your primary home for at last two years out of the past five years. So if you inherit a house and then immediately sell it, you will need to pay capital gains on the full sale price, unless you live in the house for at least two years first before selling.
Here are some common questions people as about selling inherited property.
If someone dies while they still have a mortgage, someone will need to continue making the monthly mortgage payments. The executor of the estate will generally handle this duty during probate with estate funds, but a house can be passed on even if it has a mortgage, and the inheritor will need to take over mortgage payments. (Assuming a mortgage may also require you provide financial documents to the lender.) When you inherit property, you'll also take over necessary payments associated with the house, like property taxes and insurance.
No, you don’t need to report an inheritance to the IRS in most cases. One exception is if you inherit property from a nonresident alien or a foreign estate, and it’s worth more than $100,000. You must report that to the IRS, using Form 3520, even if you don’t need to pay any tax on it.
If you inherit a house that went through probate, keep in mind that it was almost certainly appraised at that time and the IRS will track that value in case you sell the house later. If your inherited home doesn’t go through the probate process, you may want to have it appraised anyway, because the IRS will use its value at the time it’s passed on to determine how much tax you pay on the sales gain. If you don’t know the home’s value, that could complicate your income tax return.
The sale of inherited property may be subject to taxes, but it generally does not count as income for the purposes of income tax. When you sell inherited property, you may need to pay capital gains tax on any increase in the property's value since the original owner acquired it. The amount of capital gains tax you will owe will depend on the tax laws in your country, as well as the sale price of the property and the original cost basis. It's important to consult with a tax professional or attorney to understand your obligations and any potential tax consequences before selling inherited property.
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