Sale of an Inherited Home: Taxes, Probate, and How to Sell

Emily Kordys

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Emily Kordys

April 6th, 2021
Updated April 6th, 2021

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Tax implications | Selling an inherited house | Selling now | Selling later | Selling quickly vs. getting maximum value | Selling a home as-is vs. fixing it up

🔑 Key Takeaways:
  • Before you can sell an inherited home, the estate must first go through a legal process known as probate, which can take between 9-24 months.
  • You can avoid or reduce your capital gains tax bill by taking advantage of the "stepped-up" tax basis that applies when you sell your home.
  • Depending on where you live and the value of the estate, you most likely won't have to pay an inheritance or estate tax on a property that you inherit.

Before you can sell a home you’re going to inherit, the estate must first go through a legal process known as probate.

The process begins when a court reviews the deceased’s will to determine its validity and authenticity. All assets are frozen during this time and cannot be sold. Probate can take anywhere from 9-24 months on average.

Once the court approves the will, an executor of the will is appointed to act on behalf of the wishes of the deceased. They are responsible for paying all outstanding debts, including any money left on the mortgage. If the debt is greater than the total assets of the estate, the executor may sell the home.

After all of the debts have been paid, the executor will distribute what is left of the estate to the heirs. Once this process is complete, the inherited home can be sold.

Important Note: Each state has its own probate laws. It’s important to check with a lawyer or your local courts to determine what exactly the process entails.

Tax implications of inheriting a house

Types of taxes for inherited homes 💰
Taxes paid to the government for profits earned from the sale of an asset

Applies in all states
State tax paid by a person who inherits a property

Only six states charge inheritance taxes
Federal or state tax on a person’s assets after death

Only 12 states charge estate taxes

Taxes are a significant concern when it comes to selling an inherited property. Sellers are often worried that they’ll be saddled with a tax bill they can’t afford or that takes a huge chunk of their inheritance.

Fortunately, when you inherit a property, there are many benefits that can help you avoid or reduce your tax burden when you sell your home.

Capital gains

Inheritors are only subject to federal capital gains taxes if they plan to sell their inherited home. The taxes are reduced through a provision known as the “stepped-up” tax basis.

The “stepped-up” tax basis allows those who inherit a property to enjoy lower capital gains taxes, which are paid to the government upon the sale of a house. Here's how that works:

  • During the probate process, an appraiser will determine the home’s fair market value (FMV) on the date of the original owner’s death.
  • This new FMV is known as the stepped-up basis.
  • When you sell, you're only taxed on the difference between the sales price and the stepped-up basis; you don't have to pay capital gains tax on the full value of the home.

For example, a person inherits a house with a FMV of $300,000 recorded on the date of the prior owner’s death. The person then sells the property for $325,000 a few years later. The seller would only owe capital gains taxes on $25,000. The tax bill would pencil out to $3,750 due to long-term capital gains taxes.

Important Note: Capital gains are also charged at the state level.

Long-term capital gains

When you sell your inherited home, you pay long-term federal capital gains tax rates. From a tax perspective, it’s as if you’ve owned the home for longer than one year. [1]

Long-term capital gains are taxed at 0%, 15%, or 20%, depending on your income and tax filing status.

Long term capital gains tax bracket 2020-21
Tax Rate
Single
Married, filing jointly
Married, filing separately
Head of Household
0%
$0-40,000
$0-80,000
$0-40,000
$0-53,600
15%
$40,001-441,450
$80,001-496,600
$40,001-248,300
$53,601-469,050
20%
$441,451 or more
$496,601 or more
$248,301 or more
$469,051 or more
Information is taken from the Internal Revenue Service (IRS) for the 2020-2021 tax season

Capital gains exclusion

Sellers who move into their inherited home may be eligible for a capital gains tax exclusion when they sell. If they qualify, they would sell their inherited property and be exempt from capital gains taxes on the first $250,000 if they file as single or $500,000 if they file a joint tax return with a spouse.[2]

Two conditions must be met before the capital gains exclusion would apply:

  • The seller would need to use the inherited home as their primary residence for two years out of a five-year period.
  • The seller must not have used the capital gains exclusion within the past two years.

Homes sold below the asking price are known as a capital loss. They can be claimed as a loss on taxes in most circumstances.

Important Note: Tax law only allows a certain amount of losses each year, so the seller may have to carry over part of the loss to the following year and potentially longer until it has been balanced.

Inheritance tax

Most people who inherit a home won’t have to pay inheritance taxes.

Only six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — have inheritance tax laws. The rules differ by state, the estate size, and asset types.

Some states exempt the deceased’s spouse and children — meaning money and items that go to them aren’t subject to the inheritance tax.

Estate tax

Only high-value estates are charged federal and state estate taxes.

Estate taxes are taxes on a person’s assets after death. In 2021, the federal estate tax applies to estates worth over $11.7 million.

Twelve states and the District of Columbia also collect estate taxes at the state level. The exemption amount is over $1 million for each state that charges an estate tax.

Estate and inheritance tax locations

Here is a map showing the states that pay inheritance and estate taxes. The only state that pays both is Maryland.

Should you sell an inherited house?

There are three important factors to consider when determining if you should sell your inherited house — finances, time, and energy.

If you don’t want your inherited house, you can sell it as soon as the probate process is complete. However, if you’re willing to hold onto your property, you could:

  • Rent it out
  • Move-In
  • Make changes before you sell

🏡 Reasons to sell now
  • No upkeep or maintenance
  • Having the money from the sale in-hand
🗓Reasons to wait to sell
  • Time your sale to get the most value for your home
  • More time to prep the house for sale
  • Bigger tax breaks

Reasons to sell your inherited home now

1. No upkeep or maintenance

Paying for constant upkeep and maintenance on a property that is not your main home can cost a pretty penny.

Costs can include:

  • Repairs: $170 per month
  • HOA fees: $250 per month
  • Utility bills: $200 per month
  • Property taxes: $220 per month
  • Lawn care and snow removal: $130 per month
  • Homeowners insurance: $80 [3]

Selling an inherited home quickly is the best option available for those who want to avoid paying for constant upkeep and maintenance.

2. Having the money from the sale in-hand

Inheriting a home can be a financial windfall. If you choose to sell your inherited home right away, you will have access to funds that you can use at your leisure.

You could use the money to pay off your primary home, buy a new home, pay off your debts, or even invest.

Reasons to wait to sell your inherited home

1. Time the sale of your inherited home to get the most value

Owners looking to get the most value for their home should wait until market conditions favor sellers, not buyers.

A seller’s market occurs when housing demand exceeds supply — meaning there are many interested buyers but not enough housing to go around. During this type of housing market, buyers tend to enter bidding wars for homes that end up going thousands of dollars above the asking price.

If you want to know more about market conditions or the best time to sell your inherited property, talk to a real estate agent to learn more about your options.

How much is your home worth?

Our Concierge Team can connect you with an agent that can help you figure out how much your home is worth, free of charge without any commitments. Compare professional estimates from local agents near you — free with no obligation.

2. More time to prep the home for sale

Waiting to sell your inherited home can give you more time to prep the house for sale.

Inheritors don’t just usually inherit the property itself, they also inherit everything inside. It may take you some time to go through past belongings to determine what you want to keep and what you want to sell.

Taking the extra time to prep also allows you to think over if you want to make any big changes to the home before selling it.

Renting out a property

Pros of renting out your inherited home

  • Extra income

  • Property appreciation growth over time

Cons of renting out your inherited home

  • Upkeep of maintenance

  • Tenants are not guaranteed

Renting out an inherited home can be a good option for owners who want to wait to sell their house.

One of the most significant upsides to renting out your property is the steady stream of income that renters will provide. The monthly checks you receive for rent could go towards paying off the mortgage if there is one or towards regular upkeep and maintenance.

Renting out your home will also allow for property appreciation over time. Even if the house doesn’t undergo many changes, home values in the area could increase over time, giving you the potential for more money when you do sell your property.

The biggest downside to renting out your home is the constant need for upkeep and maintenance. Regardless of whether you have tenants or not, you will still be required to pay property taxes, home insurance, and any homeowners association (HOA) fees.

Moving into the property

Pros of moving into your inherited home

  • Significant tax benefits

Cons of moving into your inherited home

  • Figuring out what to do with your current living situation

Another option available for inheritors is to move into their new home.

Moving in could help you qualify for a capital gains tax exclusion when you sell. You would be exempt from paying capital gains taxes on the first $250,000 or $500,000 if you file a joint tax return with a spouse. It would only apply if you lived in the house for two years out of the past five.

The only potential issue that can arise from moving into your inherited home is if you already own another home. You would either have to sell it or use it as a rental property.

Selling quickly vs. getting the maximum value for your home

Selling your home quickly 🏡
Getting maximum value for your home 💸
  • Cash buyers can close on a home within 14 days
  • Sellers will get offers below the asking price when selling their home quickly
  • Traditional buyers make offers around the listing price of the home
  • Buyers are pre-approved for a mortgage and work with real estate agents

If you’re looking to sell your inherited home, it’s important to determine what’s more important — selling your home quickly or getting maximum value.

Selling your home quickly

Cash buyers are a good option for homeowners looking to sell quickly since they can close on a transaction within a matter of weeks.

Some people who inherit a home may not want to worry about upkeep and maintenance, which can cost hundreds of dollars each month. Sellers who sell to a cash buyer can hand off the keys within 14 days of signing the contract.

Cash buyers, including iBuyers and investors, will pay all cash for your home — though it may be far below the listing price depending on the condition.

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Getting maximum value for your inherited home

If you’re looking to get the most money possible for your property, it’s best to target a traditional buyer.

Traditional buyers work with their own real estate agents to find homes that match their needs. They are typically pre-approved for a mortgage and make offers in or around the listing price of your home.

Selling a home as-is vs. fixing it up

Homeowners who don’t want to invest any time or energy into their inherited home should consider selling their property as-is.

However, if they’re willing to put in both the time and resources to fix up their inherited home, it could net them a higher market value when they list their home.

Selling the property as-is

Selling a property as-is is best for owners who want to sell their homes quickly, without making any significant changes. They tend to be successful and attract more buyers if the property has been decently maintained.

One of the big reasons sellers tend to move away from making mass renovations on inherited homes is the return on investment (ROI). If there are major repairs that need to be made to the house, it is often considered deferred maintenance. In this case, if the owner were to make big changes, it would be to bring the home up to standard, which would not incur a high ROI.

However, making minor repairs to a home, such as painting or updating the landscape, can up the home’s value. Painting the interior of a house generally costs between $4,000-11,000 on average for a 2,300 square foot home.

Renovating a property

Renovating a home can add value to your property and increase its selling price when it hits the market.

Before you decide to renovate your home, it’s essential to have it assessed so you know what upgrades should be made. Fixing up the home could include a complete remodel or major upgrades to areas such as the bathrooms and kitchen.

Renovating a property doesn’t have to come out of your own pocket. You can finance your renovation through a Home Equity Line of Credit (HELOC). HELOCs are secured against the value of the equity in your home. Lenders typically offer lower rates than personal loans, typically around 2%.

If you’re not sure where to start with your inherited home, Clever makes it simple to connect with top agents in your area. We can provide introductions to our nationwide network of trusted partner agents who work for 1% commission or $3,000, depending on your home’s value.

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ARTICLE SOURCES
[1]

IRS. "Sales and Other Dispositions of Assets." Accessed March 19, 2021.

[2]

IRS. "Sale of Your Home." Accessed March 19, 2021.

[3]

American Family Insurance. "How Much Are Average Home Maintenance Costs?." Page(s) page numbers. Accessed March 19, 2021.

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