If a death in your family has recently landed you with some property via inheritance, you probably have many questions.
Do I need to hire a special attorney? Do I need to go through the probate process at all? And the most stressful questions — the tax questions.
There’s lots of confusion regarding the taxes on these particular types of real estate transactions, but our Kind House Buyers Guide should clear up every probate sale-related question you have. Find out everything you need on matters related to everything from inheritance and the capital gains tax to attorney advice, fair market value, and more.
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What Is a Probate Sale?
Ideally, when a property owner dies, they will already have written guidelines into their will to direct the process of either selling or bequeathing the home to a descendant. Unfortunately, that’s not always the case.
Sometimes, in the event of an owner’s death, there is no will or trust to adjudicate the transfer of the property. What happens then?
If there is no clear choice of inheritor after the owner’s death, a personal representative to the deceased or the estate lawyer will need to take on the job of executing the home sale. A probate transaction involves an executor to the estate stepping in to manage this transaction.
The process entails hiring a real estate agent to inspect the house, appraise the house, set a price, possibly order renovations on the house, and ultimately sell the house. The executor will then divide the profits from selling the estate to allocate to the recipients.
The probate sale also entails a different process for accepting offers. The agent will assess bids on a neutral basis, but they need to receive permission from the courts before accepting an offer. That can be tricky and take up to 30 days, and this is just the process of selling the property.
There are also questions about capital gains taxes, the home sale tax exclusion, stepped-up basis rules, and more, which we’ll get into next.
What’s the Best Way to Sell a Probate House?
Do you have to go through probate to sell a home that belonged to a deceased relative with no will? Technically, no, but generally, most roads lead back through probate.
One must have legal ownership to sell and derive any gain from a property. Without a legally binding transfer etched into a will, possible beneficiaries of the estate will need to go through probate.
Each state has a different process and court system for probate house selling. You and your lawyer need to understand the specific requirements of the selling process. But generally, probate sales follow these five steps:
- File the petition to initiate the property sale.
- Provide notice of the sale to creditors and beneficiaries.
- Pay off the total value of the deceased’s debts, taxes, and expenses.
- Transfer the legal title per state law.
- Distribute the estate among beneficiaries.
Selling a home can often help with any debts or fees associated with the home or property. The fastest way to sell a house through this process is by going with a professional cash buyer like Kind House Buyers. Cash buyers can work around houses that don’t qualify for traditional mortgage financing on the basis of needing renovations, so we’re the best equipped to close fast on selling homes through probate.
Can I Apply the “Home Sale Tax Exclusion” to My Probate Property?
The home sale tax exclusion is a way of saving yourself from paying a huge chunk in income from selling if you make a profit. If you’re single, you can file up to $250,000 capital gains tax exclusion, and if you are married and file taxes jointly, you can receive up to $500,000 capital gains tax exclusion.
Do these tax exclusions apply to an inherited property? That depends on whether you ever lived in and paid taxes on the house. The primary qualification for this tax break is that you occupied the property as a resident for at least two of the past five years.
You have the option to move into the home, take over the taxes, and sell it in two years. But if you can’t wait or that’s too inconvenient, you can take advantage of stepped-up basis rules.
What Are “Stepped-Up Basis Rules” When Inheriting a House?
“Basis” is another word for cost in tax jargon. When you hear about a property’s “tax basis,” that’s code for whether the current owner will gain or lose upon selling the house.
The tax basis of a home depends on when the home gets passed down through inheritance instead of a traditional sale. Upon the owner’s death, the inheritor automatically receives a stepped-up tax basis.
That means you get to appraise the home at fair market value at the time of the owner’s passing, not at the time of their initial purchasing of the home. In this way, you stand to receive potentially substantial tax savings through a stepped-up basis.
Inheritors in this kind of transaction won’t benefit from being beneficiaries of the home sale tax exclusion. Therefore, they don’t receive up to $500,000 in capital gains tax exemption. But with stepped-up regulations in your favor, you may not even need that exemption.
Suppose a home sells for $300,000, and you were able to appraise the home at that fair market value, rather than, say, $150,000 at the time of original purchase. You will qualify for exclusion and won’t have to deal with taxes on any profit.
Can I Deduct “Capital Loss” from My Taxes?
More luck is in store for you. If you sell an inherited house at less than its market value, you may claim a capital loss. Capital losses reduce the amount you have to pay in taxes.
You can claim a capital loss if and only if all four of the following statements are true:
- The property sale occurred in an arm’s length transaction.
- The property will be sold to someone unrelated to the deceased’s family.
- The property won’t be for use by anyone related to the deceased for personal purposes.
- The property is not a converted structure for some other kind of use leading up to the sale.
Take Control of the Home Selling Process
The last thing anyone wants to do when someone they know and love dies is to think about money. Money complicates life and inserts tension into relationships, especially when you’re dealing with the amount of money that comes with putting property up on the market.
But it doesn’t have to be stressful. At Kind House Buyers, we are a husband and wife duo who have built their business by buying a house for cash. Going by way of cash makes the process fast, painless, and problem-free.You don’t want to be bickering with lawyers, agents, and financiers mere days after your loved one’s passing. Call Kind House Buyers today to see how an all-cash offer can help you get a home off your hands in record time.