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(The information shared is for informational purposes only and is not meant to be taken as legal advice. Please consult your attorney if you feel you have further questions about this subject.)
After inheriting a house, you have several critical financial decisions to make and need to consider the liabilities of the inherited home, which include federal estate and capital gains taxes
Given the emotional nature of the process, you may find it challenging to navigate the legal responsibilities and financial implications of the inheritance
For many, this leads to a natural question—should I sell my inherited house?
The estate tax in the United States is a tax on the transfer of the estate of a person who dies. The tax applies to property that is transferred by a will or, if the person has no will, according to state laws of intestacy
Other transfers that are subject to the tax can include those made through a trust and the payment of certain life insurance benefits or financial accounts
The estate tax is part of the unified gift and estate tax in the United States
The other part of the system, the gift tax, applies to transfers of property during a person’s life. In addition to the federal estate tax, many states have enacted similar taxes
These taxes may be termed an “inheritance tax” to the extent the tax is payable by a person who inherits money or property of a person who has died, as opposed to an estate tax, which is a levy on the estate (money and property) of a person who has died
The tax is often the subject of political debate, and opponents of the estate tax call it the “death tax”. Some supporters of the tax have called it the “Paris Hilton tax”
If an asset is left to a spouse or a federally recognized charity, the tax usually does not apply. In addition, a maximum amount, varying year by year, can be given by an individual, before and/or upon their death, without incurring federal gift or estate taxes: $5,340,000 for estates of persons dying in 2014 and 2015, $5,450,000 (effectively $10.90 million per married couple, assuming the deceased spouse did not leave assets to the surviving spouse) for estates of persons dying in 2016
Because of these exemptions, it is estimated that only the largest 0.2% of estates in the U.S. will pay the tax
For 2017, the exemption increased to $5.49 million. In 2018, the exemption doubled to $11.18 million per taxpayer due to the Tax Cuts and Jobs Act of 2017. As a result, only about 2,000 estates per year in the US are currently liable for federal estate tax
Note that oftentimes property taxes will increase when the property changes ownership. For instance, the beneficiary of the property may have to pay Capital Gains Taxes when they receive the property
The capital gain tax is a crucial consideration when you inherit a house, especially if you intend to sell it. This 15% Federal Tax is collected on the capital gain on the home, not the selling price
To calculate capital gains, the IRS determines the tax basis of the home, which in the case of inheritance, is the fair market value of the house, and subtracts it from the sales price. This type of tax basis is often referred to as “stepped-up” because it is typically higher than the home was initially purchased for
For example, Person A purchases a house in 1980 for $70,000. Fifty years later, in 2021, Person A dies and leaves the house to Person B in their will. On the date of Person A’s death, the house has a value of $200,000. In this example, Person A’s basis is $70,000, which is the price they paid for the house
However, Person B’s basis is “stepped-up” to $200,000. If Person B decides to sell the house immediately for $200,000, there is no capital gain, and Person B will owe no capital gains tax
If Person B waits for five years and sells the inherited home for $250,000, they have to pay a $7,500 capital gains tax, which is 15% of the $50,000 capital gain from the sale
There are several things you should consider before deciding what to do after inheriting a house. These considerations include your legal and financial responsibilities, tax implications, and the condition of the property
The wishes and economic situation of anyone with shared ownership of the inherited house may also be a crucial factor to consider
If you’ve inherited a home, you really have 3 choices: live in it, sell it, or rent it out. Some individuals will move into an inherited home and sell their own property that they’ve been living in
Others will rent the home out and sell belongings through an estate sale
Here are some key factors in deciding the right option for your situation
Consider Value
Understanding the value of the property is the single most important factor in making sound choices. There are a number of online tools that will predict the value of your property but keep in mind that these estimates can vary greatly depending on the condition of your home, especially if the property hasn’t been updated or well-maintained, needs significant repairs or is cluttered with stuff
Assess Debt
Many times, inherited homes come with an outstanding loan obligation or liens such as a mortgage, HELOC, or tax bills
Assuming there is equity in the inherited property, then loans and debts would be settled at the closing of the sale. So, it’s important to understand that these things will be deducted from your equity when you sell your property
Settle Conflicts
The number of individuals that are inheriting the property can alter the process greatly
Conflicts may hinder a successful sale, or even affect even the buyers in the future
Be sure that the executor of the deceased’s last will and testament has full authority to liquidate the estate which can include the home. If the deceased died without a Will, known as “Intestate”, you may have to mutually agree with other heirs to sell or keep the property
Getting clarity on those 3 areas will make it much easier to decide what to do with the home. And in the meantime, be sure you track down the documentation for things like the homeowner’s insurance and utilities and ensure that the mortgage and property taxes are being managed
If you have an inherited property that has been cleared to sell, Help Us Help You, Inc. is happy to help
