Did a loved one pass, and you’re planning to sell the property you’ve inherited from them? While an inherited property can seem like a wonderful, sentimental gift, it can also be a burden for some people who don’t have the financial means to keep the property afloat. Sometimes, deciding whether to keep or not is a difficult process.
If you’re set on selling the property, it would be wise to remember that there are slight differences between selling a home you purchased versus selling a home you inherited. Pricing-wise, there are more things to consider when you sell an inherited house. In this article, we give you five things to do or remember as you set the price of your inherited home.
Tip #1: Know It’s Fair Market Value at the Time Of Death
There are a lot of ways to value a property. According to the IRS, the most basic and recommended value when selling inherited property is the Fair Market Value (FMV) at the time of death of the decedent. Fair Market Value does not anymore take into account the purchase price and the cost of upgrades over the years by the original owner.
This becomes advantageous for you in the sense that if you sell your home right away at that price point, you’ll be able to gain the equity but won’t have to pay for capital gains tax at the same time. Only if you decide to hold on to the property and wait for its value to appreciate more before selling will you be paying capital gains tax (which is now based on the difference between your current selling price and the fair market value at the time of death, thanks to the Step-Up in Basis!)
In general, the FMV is relevant for:
- Reporting of taxable gain or loss (after the sale)
- Inventory (in case of probate)
- Fair division of estate assets to beneficiaries
Tip #2: Get At Least Three (3) Real Estate Agents to Estimate Price
Real Estate Agents or brokers aren’t only here to sell property. Companies nowadays offer partial services, including conducting a comprehensive market analysis (CMA) alone. This is because some homeowners aren’t always fully decided until they know how much they’re going to gain from selling their house.
The benefit of getting an official CMA is that you’ll have an official document you can show to your buyers as basis for your price. When choosing a broker or real estate agent to do your CMA, make sure they are knowledgeable about your neighborhood. Additional points if they’ve sold a house in the area!
Tip #3: Hire a Licensed Real Estate Appraiser
While real estate agents can provide an excellent comprehensive market analysis report, only a licensed real estate appraiser can provide the official appraised value. A third-party appraiser is typically hired to rule out bias. If you have your real estate agent also perform the appraisal, there’s a possibility that the appraised value will be higher for them to get more commission.
If you can find a good real estate appraiser, you won’t have to hire a real estate agent anymore to do a comprehensive market analysis. According to FixR, the average appraisal cost of a home between 1,300 ft2 – 1,700 ft2 is about $400. But the price also depends on the number of upgrades in the property and the level of detail the appraiser must consider.
Tip #4: Understanding Tax Implications
People who aren’t happy with inheriting a property are usually those who are familiar with the taxes that come along with it. That’s also why some beneficiaries want to sell the inherited property right away.
Inheritance Tax
Inheritance tax is paid by the beneficiary upon receipt of property. The good news is that Georgia doesn’t impose this tax. Only Iowa, Kentucky, Pennsylvania, Nebraska, Maryland, and New Jersey. But we’re mentioning this here because people sometimes are confused with it.
Estate Tax
On the other hand, Estate Tax is tax that is taken from the deceased’s estate upon their death. If your loved one’s assets, including your inherited property, is over $12.06 million, a federal estate tax will be subtracted from it. Like inheritance tax, Georgia doesn’t impose this. Well, they did before 2014, but not anymore. And we’re also just including it here to clarify it.
Capital Gains Tax
The IRS requires that proceeds from the sale of any house are to be reported under taxable income. However, you’re only taxed if the difference between the property’s base value and your current sale value exceeds $250,000 (for singles) or $500,000 (for couples).
To recall, base value is how much you bought the property for. However, in the case of inherited properties where the beneficiary didn’t pay for the home, the Fair Market Value Upon Death now becomes the “base value”.
So, supposing the FMV Upon Death of your inherited home is $300,000; then you spent $21,000 for upgrades and sold it for $500,000 three (3) years later; that means that you were able to gain $179,000 as profit. Since this value falls below $250,000/$500,000, you are a step closer to qualifying for capital gains tax exemption. Why only a step closer? Because there are still other requirements you need to satisfy.
Tip #5: Is There an Outstanding Mortgage and Other Debts?
Last is knowing if your loved one still has an outstanding mortgage on the property. If so, you’ll have to account for this when setting your sale price because your buyer will be the one shouldering it once purchased. Likewise, if the property is tied to other liens, you will have to speak to each one of them before selling the home.
For more information on selling inherited houses, talk to us at Spire Home Buyers. We help homeowners find the right solution they need fast. You can contact us at (678) 318 – 1801.