There are three things you can do after inheriting a home: One, own it as your principal residence or turn it into a vacation house; two, rent it; three, sell it.
Now, there are several reasons why you should pick option number one. Some people do not like hand-me-downs and others see them as memento. The latter is true especially when it comes to pre-owned properties, let alone a house. It is nice to know you have an alternative home to settle in whenever you are in town. You can also move to the property should you decide to change location.
Reason number two is self-explanatory. You don’t want to sell your inherited home but you cannot move in yet (or you probably have no plans to). So rent it. Make some money while keeping your relative’s legacy.
Meanwhile, if owning or renting the home is not in your books, you might as well sell it. This is a lot more complicated compared to the first two choices. But, it is more preferable if keeping it only spawns a series of financial and legal issues.
Selling An Inherited Home
Selling an inherited home either offers gain or loss. It depends on several factors. An heir can enjoy home sale tax exclusion or stepped up basis.
What Is Home Sale Tax Exclusion
The Home Sale Tax Exclusion policy grants you $250,000/$500,000 tax-free sale. It means $250,000 or $500,000 of the sale is non-taxable if you pass all qualifications:
- You have lived at least two years in the property within five years before sale.
- The inherited home is your principal residence.
- To benefit from the $500,000 exclusion, married couples should file an annual joint return especially during the year of the sale. Either of the spouse should also pass the ownership and use test.
What Is Stepped-Up Basis
The term ‘basis’ refers to the original cost of your home before sale. For example, the cost of the inherited home is $200,000 (basis) and you decide to sell it for $250,000. When you subtract the basis from the sale price and get a negative difference, it means you had a loss. If it returns a positive difference, it means you gained. This is your stepped-up basis.
The stepped-up basis sometimes offers bigger profit, which renders Home Sale Tax Exclusion unnecessary.
Things To Remember
- Selling an inherited property is a lot of work for people who barely understand taxation and other legalities. Since tax is a huge matter to deal with during the process, it is best call a tax lawyer or an accountant. These people will help determine tax implications and figure out other finance stuff.
- You may also contact a real estate agent to help you sell the house and secure your profit. The agent will give you insights about market status, when to sell, and how much. If you are looking for even more information you should check out this extensive guide on whether or not you should sell an inherited house by Grant Gerhart of Integrated Realty Group.
- Have the inherited property also checked for flaws and damages. If the property is in bad shape, have it remodeled or updated. Call a professional home inspector to identify areas that need to repair or replacement. This will also increase your property’s market value.
- Even before all the details of the sale is in place, start clearing the inherited home of the previous owner’s personal belongings. Selling the house and going through all the stuff left behind can be emotional but you need to decide what to do with all these.
Selling an inherited home can be easier if you seek help from professionals. Make sure you find reliable people to work with you for smoother process.