What to do when you inherit a house:
Inheriting a house in the District of Columbia, Maryland, or Virginia can be both a wonderful gift and a challenging burden. If you inherited a home, you most likely just lost a loved one. Working your way through the intricacies of probate procedures, federal tax, state tax, and more while dealing with the loss of a loved one is an incredible challenge. In this article, we’ve put together a roadmap that will tell you everything you need to know about inheriting a house.
The Probate Process
The probate process can be divided into several steps. The first step is to determine whether the decedent had a will. If there is a will, the executor of the estate will be responsible for carrying out the wishes of the deceased. If there is no will, the court will appoint an administrator to manage the estate. The administrator will be in charge of distributing any remaining assets to the beneficiaries or heirs.
There are several types of taxes that you may have to worry about after a loved one has passed. Income and probate taxes, estate taxes, inheritance tax, and capital gains or loss tax. If you’re the personal representative for someone’s estate, then you’ll have to file the decedent’s income taxes. This can include income taxes (state and federal), and fiduciary income taxes (state and federal). You’ll also have to pay probate taxes and possibly inheritance tax. A is advised to hire a CPA who has vast experience in handling inheritance tax issues.
Capital Gains Tax
The “Step Up Basis” is a crucial concept in the realm of real estate inheritance that can provide significant tax benefits to heirs. Essentially, when a property is inherited, its tax basis is “stepped up” to the fair market value at the time of the original owner’s death rather than the initial purchase price. This adjustment helps heirs avoid the capital gains tax on the appreciation that occurred during the deceased owner’s lifetime. For example, let’s consider a house in Montgomery County, Maryland, purchased by the original owner for $250,000. Over time, the property appreciates to $500,000 when the owner passes away. If the heirs inherit this house, they receive a step-up basis, which means the new tax basis is the current market value of $500,000. If they decide to sell the property for $500,000, they won’t owe any capital gains tax, as there’s no gain in value since the deceased owner’s passing. This provision ultimately helps heirs maximize their inheritance while minimizing tax liabilities.
Selling the Inherited House
If you opt to sell the inherited property, several factors require careful consideration. Firstly, determining the property’s value is essential, which can be achieved by engaging a professional appraiser or utilizing online valuation tools. Subsequently, assess the financial viability of upgrading the property versus selling it in its current condition.
Upon establishing the property’s value in accordance with its condition and the market, you must decide whether to undertake the sale independently or engage the services of a real estate agent. Should you choose to sell the property yourself, be prepared to manage marketing efforts, coordinate property showings, and negotiate with prospective buyers. Alternatively, if you opt to work with a real estate agent, it is crucial to select one with experience in handling inherited properties, as their expertise could prove invaluable in securing the highest possible sale price. Additionally, ensure that the chosen course of action aligns with the best interests of the estate as determined by the court.
Consider a Cash Offer
As a real estate professional with expertise in probate property sales, my approach focuses on securing cash offers to establish a solid foundation for our strategy. By identifying the highest cash offer—ensuring that contingencies are removed and verifying its authenticity as a non-wholesale, non-assignable offer—we can then evaluate the potential costs associated with upgrading the property. This assessment takes into account the projected sales price upon completion of improvements, as well as the time and expenses involved in the process. In many instances, though not always, it becomes evident that investing in property improvements can yield a sales price for the estate that is 20-50% higher than accepting a less competitive cash offer.