In the event that you have recently inherited property due to a family member’s passing, it is likely that you have numerous questions.
Do I require the services of a specialized attorney? Is it necessary to navigate the probate process? And the most anxiety-inducing questions revolve around taxes.
There is often a great deal of confusion surrounding the taxation aspects of these specific real estate transactions. However, our comprehensive 1st Key Homebuyers Guide is designed to address all of your questions regarding probate sales. Read on to discover essential information pertaining to topics such as inheritance, capital gains tax, legal counsel, fair market value, and much more.
What Is a Probate Sale?
In an ideal scenario, when a property owner passes away, they would have already established clear instructions in their will regarding the sale or transfer of the home to a designated heir. However, this is not always the case.
In situations where there is no will or trust to govern the property transfer after the owner’s death, what happens then?
If there is no designated inheritor following the owner’s passing, it becomes the responsibility of a personal representative or an estate lawyer to oversee the sale of the home. This process, known as probate, involves an executor who steps in to manage the transaction.
The probate process involves engaging a real estate agent to assess the property, conduct an appraisal, set a price, potentially carry out necessary renovations, and ultimately sell the home. The executor then distributes the proceeds from the sale among the beneficiaries.
Accepting offers in a probate sale involves a different procedure. The agent evaluates bids in an impartial manner, but they must seek court approval before accepting any offer. This can be a complex and time-consuming process, taking up to 30 days, and it solely pertains to the property sale.
Furthermore, there are additional considerations such as capital gains taxes, the home sale tax exclusion, stepped-up basis rules, and more, which we will discuss in the following section.
What Is The Best Way to Sell a Probate House?
Is it necessary to go through the probate process in order to sell a home owned by a deceased relative who had no will? Technically, it is not required, but in most cases, probate is the common path to follow.
To sell and gain from a property, one must possess legal ownership. Without a legally binding transfer specified in a will, potential beneficiaries of the estate typically need to undergo probate proceedings.
Each state has its own unique probate process and court system for selling houses. It is crucial for you and your attorney to comprehend the specific requirements of the selling process. However, probate sales generally involve the following five steps:
- File a petition to initiate the sale of the property.
- Provide notice of the sale to creditors and beneficiaries.
- Settle the deceased’s debts, taxes, and expenses.
- Transfer the legal title according to state law.
- Distribute the estate among the beneficiaries.
Selling a home can often help cover any debts or fees associated with the property. The quickest way to sell a house through this process is by working with a professional cash buyer like 1st Key Homebuyers. Cash buyers are experienced in dealing with properties that may not qualify for traditional mortgage financing due to renovation requirements, making us well-equipped to swiftly complete the sale of homes in probate.
Can I Apply the “Home Sale Tax Exclusion” to My Probate Property?
The home sale tax exclusion offers a means of avoiding substantial income taxes when you sell a property at a profit. If you are single, you can claim a capital gains tax exclusion of up to $250,000, while married couples filing jointly can receive up to $500,000 in capital gains tax exclusion.
Now, do these tax exclusions apply to an inherited property? Well, it depends on whether you lived in the house and paid taxes on it. To qualify for this tax benefit, the main requirement is that you resided in the property as your primary residence for at least two of the past five years.
One option is to move into the inherited home, assume the tax responsibilities, and sell it within two years. However, if waiting or the inconvenience is not feasible, you can take advantage of the stepped-up basis rules.
What Are “Stepped-Up Basis Rules” When Inheriting a House?
The term “basis” in tax language refers to the cost of a property. When discussing a property’s “tax basis,” it indicates whether the current owner will experience a gain or loss upon selling the house.
In the case of inheriting a home instead of a conventional sale, the tax basis of the home varies. When the owner passes away, the inheritor is granted a stepped-up tax basis automatically.
This means that you can assess the home’s value at the fair market value at the time of the owner’s death, rather than its original purchase price. Consequently, you have the potential to enjoy significant tax savings through the stepped-up basis.
In this type of transaction, inheritors do not qualify for the home sale tax exclusion, which provides up to $500,000 in capital gains tax exemption. However, with favorable stepped-up basis regulations, you may not even require that exemption.
For instance, if a home sells for $300,000 and you were able to appraise the home at its fair market value, such as $150,000 at the time of the initial purchase, you would be eligible for the exclusion and wouldn’t be liable for taxes on any profit.
Can I Deduct “Capital Loss” from My Taxes
Fortunate circumstances await you. When selling an inherited house for less than its market value, you have the opportunity to declare a capital loss, which can effectively lower your tax liability.
To be eligible for a capital loss claim, all four of the following conditions must be met:
- The property sale was conducted through an arm’s length transaction.
- The property will be sold to an individual unrelated to the deceased’s family.
- The property will not be utilized for personal purposes by any family member related to the deceased.
- The property has not been converted for an alternative purpose before the sale.
Take Control of the Home Selling Process
The topic of money is the last thing one wants to deal with after the loss of a loved one. The complications and financial strains that arise from selling a property can add unnecessary stress to an already difficult time.
However, there is a way to simplify this process and alleviate the burden. At 1st Key Homebuyers, we are a married couple who have established our business by purchasing homes for cash. Opting for a cash transaction ensures a quick, seamless, and hassle-free experience. The last thing you need is to engage in disputes with lawyers, agents, and financiers shortly after the passing of a loved one. Contact 1st Key Homebuyers today to discover how an all-cash offer can assist you in swiftly relieving yourself of the property.