Selling an inherited house? You’re likely wondering about the tax implications on the sales proceeds you receive. Tax laws are confusing after you inherit a house. Several common questions pop-up again and again. We address the following questions in this blog:
- Will the “home sale tax exclusion” apply to the inherited property?
- What are the “stepped-up basis rules” when receiving probate houses?
- Can I deduct “capital loss” from my taxes?
- How quickly can I sell this inherited home?
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Does The “Home Sale Tax Exclusion” Apply to Inherited Property?
The “home sale tax exclusion” creates a capital gains tax exemption when selling a house. If you are single, you pay no capital gains taxes on the first $250,000 when selling your home. If married filing jointly, you pay no capital gains taxes on the first $500,000. This exclusion applies to the “profit” on re-sale. Qualification for this exclusion requires that you occupied the residence for at least two out of the last 5 years.
Unfortunately, since you didn’t own and reside in the inherited property for at least two of the last five years, you cannot benefit from the “home sale tax exclusion” upon inheritance. You could live in the house for two years and sell afterward to take advantage of this exemption. On a more positive note, you do qualify for a “stepped-up tax basis.”
Stepped-Up Basis Rules for Inherited Property?
“Basis” means an asset’s cost for tax purposes. If you have a positive number, you have a gain. If you have a negative number, you have a loss. Under ordinary circumstances, the “basis” of a property is its cost or purchase price.
A home’s tax basis is determined in a different way when someone inherits a home after the owner dies: you automatically receive a “stepped-up basis.” The “stepped-up basis” is the fair market value at the time of the owner’s death. This has big tax savings.
Imagine you inherit a house: (1) appraised for $200,000 at the time of the owner’s death; and (2) owner purchased for $100,000 5 years prior. After you inherit the house, you sell it for an appraisal value of $200,000.
For Regular home sales, the government would require capital gains tax on the sale profit ($100,000 profit in this example). That would be around $30,000 in taxes! However, with probate, you’re in luck. Since it was appraised for $200,000 at the time of death, and you sold for $200,000 there would be no taxes on the sale proceeds. A lot better right?
If I Sell an Inherited Home, Can I Deduct a Capital Loss from My Taxes?
YES! When an inherited house sells for less than its fair market value, you may claim a capital loss. This reduces your taxes. According to H&R Block:
Regarding capital gains on inherited property (and losses), you can claim a capital loss on inherited property if you sold it and all of these are true:
- You sold the house in an arm’s length transaction.
- You sold the house to an unrelated person.
- You and your siblings didn’t use the property for personal purposes.
- You and your siblings didn’t intend to convert the property to personal use before the sale.
An arm’s length transaction is a transaction where the buyers and sellers have no relationship with each other. Except when handling an inheritance, related parties include: the estate, the executor, beneficiaries of the estate
Consider an example. Assume the deceased purchase the house for $100,000 but it had a market value of $150,000 when he died. If you sell for $125,000, you now have a $25,000 loss (instead of a $25,000 gain). You can deduct this $25,000 loss against other capital gains. You can deduct up to $3,000 in leftover loss from your other income, or $1,500 if you’re married filing separately.
What’s the Fastest Way to Sell an Inherited House?
When you inherit house, you have several options. You can move in – an attractive option if you prefer the living quarters. You can rent it out to get monthly cash flow. These aren’t the best alternatives if the house needs repairs, you don’t live nearby, or aren’t interested in landlording. If siblings and other beneficiaries cannot agree as to the property use, selling the property and splitting proceeds is an optimal solution.
Selling an inherited house is difficult. Before you can sell, you need to go through lengthy probate litigation. In our blog How Probate Works in Washington, probate has 5 stages: filing the petition, providing notice to creditors and beneficiaries, payment of the estate’s debts, taxes, and expenses, transferring legal title in accordance with the will and/or intestate laws. This process takes months and even years on complex cases. You are paying on-going maintenance, utilities, taxes, HOA fees, and insurance all the while. Not to mention piling up attorney fees.
At the end of probate litigation, typically the court can authorize sale of house to help pay off the estate. The fastest way for this to be accomplished is with a professional cash buyer like Kind House Buyers. “We buy houses” companies maintain cash reserves and therefore are capable of closing fast. Moreover, probate property (since it was previously owned by elderly) tend to need a lot of work. Houses that need renovations don’t qualify for traditional mortgage financing due to guidelines of habitability. Therefore, cash buyers are ideal for closing probate property ASAP.
Before selling to a cash buyer, you want to make sure you are working with a professional. Check online testimonials from satisfied clients. Follow if they have a social media and public presence – verses a company that is invisible. Is the buyer registered with the Better Business Bureau? Better Business Bureau registration. Ask for cash reserves proof of funds (not a letter of credit). Legitimate cash buyers never charge any fees or costs. Don’t roll the dice on an unverified cash buyer.