The vast majority of real estate in the United States is owned by the generation known as the baby boomers; roughly 80 million people born between 1941 and 1960. According to the widely respected financial publication Forbes, in the decades to come, this generation’s control over the majority of the nation’s property will inevitably result in the conferring of over $27 trillion in real property, primarily composed of single family residential homes.
Inheritors are faced with three imminent options to guide their overall handling of a bequeathed home – selling the home, living in the home, or renting the home. While emotional inclinations may move many people to retain the home by occupying it or renting it out, financial considerations are of a critical and primary concern for many others, resulting in the impending sale of the home.
In today’s contemporary times, the real estate market reflects an immense number of inherited properties for sale. In 2017, there were a whopping 1,130,755 inherited homes on the market, with many of the properties attractively priced to move.
If you have recently inherited a home and are interested in selling the property, read on below.
Our easy-to-read primer on selling an inherited home is brimming with essential information for creating an optimal selling experience.
Top Three Considerations For Selling Your Inherited Home
“Nothing is certain except death and taxes.” The words of the famed author, inventor, and humorist Benjamin Franklin ring as true today as they did when first uttered hundreds of years ago.
It is of paramount importance to understand that Uncle Sam (the federal government) regards your inherited property as an asset with associated tax benefits. However, that tax benefit becomes rife with additional considerations the moment you decide to sell the home.
Upon the sale of the home, the capital gains that you receive are based on the market value of the property at the time of inheritance, rather than the initial purchase price. Known as “stepped up” valuation, this concept dismisses capital gains taxes for inheritors and enables them to sell their homes despite any significant increases in overall market value.
Essentially, the “stepped up” concept ensures that you receive an inherited home at current fair-market value and without tax burdens. Upon making the decision to sell the home, the amount of owed tax is solely reliant on the increase of the home’s value while under your possession.
#2. Capital Gains
The Washington Post reports that “capital gains rates are lower than ordinary income tax rates,” but there remains a strong likelihood of paying the Internal Revenue Service a large sum of money, largely dependent on an individual’s income tax bracket.
Concerns surrounding the issue of capital gains such as potential tax rates on gains ranging up to an immodest 20% can give many potential sellers of inherited homes pause.
Depending on your income bracket, the maximum capital gains tax rate was 20 percent in 2013. However, in addition to that tax, you may be subject to the Medicare surtax on net investment income of 3.8 percent. When you have high capital gains, those gains can affect your income tax return in other ways. Since you married last year, you’ll have to decide whether you are better off filing jointly or individually.
As such, some homeowners will remain indecisive towards taking action with the property immediately. If you are considering selling your inherited home in the future but opt to live there for a short time before putting it on the market, you should definitely consider the capital gains implications that are presented.
Federal law dictates that owners of inherited homes must live in the domicile for a minimum of two years in order to qualify for capital gains exclusions that are incurred on a subsequent sale. Currently, capital gains exclusions are at $500,000 for married couples whop joint file and $250,000 for single taxpayers.
Countless properties are inherited every year with tax liens attached to them. In the event that an inherited home comes along with a lien, inheritors become responsible for the related debts. Any debt attached to the home must be paid in full. Failure to do so will ultimately result in any sale of the home’s proceeds firstly going towards creditors.
Homes with attached liens can be extremely problematic for inheritors. Many will opt to initially speak with an attorney before actually accepting the property, in the hopes of gaining guidance towards making the decision if acquiring the home is ultimately even worth the trouble.
According to Grant Gerhart from Realtor.com, “Making the decision about what to do with an inherited house is a challenge on multiple levels.” Replete with a multitude of issues ranging from legal, technical, and financial aspects, inherited property requires careful deliberation in order to determine the most beneficial path to take.
As increasing numbers of property inheritors make the decision to sell their bequeathed property, they are faced with an abundance of further considerations to examine, such as issues with liens and creditors.
While selling an inherited home might seem to be a convoluted task, thoroughly understanding the risks and benefits and various pros and cons will serve to assist you in simplifying the process to become efficient, manageable, and ultimately beneficial in every aspect.