Selling an inherited house in California isn’t quite as straightforward as selling your own primary residence. Not only are you dealing with the passing of your loved one, you’re also tasked with understanding the nuances of a completely different set of laws.
We’ll walk you through how to handle the sale of an inherited property so you can figure out the best path forward, including what kind of financial implications to expect.
Assess the Local Real Estate Market
The assessed value of a house is an important factor in the sales process, as is the current sales market. In Southern California, home prices have hit a record high, with a distinct lack of affordable housing under the $500,000 mark. While sales are reported as slowing, there’s also a tight inventory and still plenty of bidding wars, according to the LA Times. Median sales prices are up between 5.5% and 8.8% across counties within SoCal.
You should also consider the time of year when determining the right time to sell an inherited house. Traditionally, spring has been the busy season for real estate. In reality, however, there are pros and cons in each season for selling your home. Summer, for example, may find a lot of potential buyers on vacation. On the flip side, there are also families who are hoping to get into a new school district in time for their kids to start in the fall.
If your home needs work before putting it on the market, be sure you factor in the time and money it will take to get it listed during your ideal season.
Determine the Value of the Inherited House
Once you have an idea of how the market is faring in your part of Southern California, it’s time to determine the value. With an inherited property, this is a little trickier because you can’t just come up with a sales price and subtract your mortgage balance and real estate agent fees to determine your potential profit.
You probably have a more complicated financial situation to deal with, not to mention relatives and joint heirs outside of your immediate family who want to offer their opinions. Let’s take a look at these factors in more detail.
Capital Gains and Losses
When you sell an inherited property, you’re required to report the sale on your taxes. The outcome of the sale determines whether it’s treated as a capital gain or loss. If you make money on the sale, you’ll have to pay capital gains tax. Here’s the catch: the basis of the house depends on when the original owner died. What does that mean for you?
If it’s taken time to get the house on the market and home prices have risen, you may owe more because your gain will be more substantial. If you sell the property for less than its basis value, you can deduct up to $3,000 as a capital loss.
How can you avoid capital gains tax on inherited property?
One way to limit your capital gains is to sell the property as quickly as possible so it doesn’t have time to appreciate. You can also help avoid paying property tax by selling before the next due date from the property’s local municipality. If you feel like the property isn’t a good investment, you also have the ability to disclaim the inheritance to avoid paying any of the taxes associated with it. Luckily, there’s no inheritance tax to worry about for California residents.
What happens if you inherit a house with a mortgage? The mortgage transfers to you as the beneficiary. You may need to sell the inherited property quickly if the mortgage agreement contains a due-on-sale clause. In some situations, this requires the mortgage to be paid when the property is transferred to another party.
Consider Enlisting Professional Help
It can take a lot of work to facilitate the sale of an inherited property, from getting a real estate agent to list the property to working with a tax professional to determine the financial impact. You may also consider an attorney if you’re having problems with relatives or joint heirs. But is hiring each of these professionals actually worth it?
Let’s start with a real estate agent. It’s certainly possible to sell an inherited property without using an agent. On the plus side, you can save a whopping 6% of the home’s sales price by avoiding realtor fees. On the downside, you could potentially lose time in terms of having someone else manage the marketing, photographs, showings, and negotiations involved with selling a property. A local real estate agent can also help you determined the assessed value of a house, which can lead to a quicker sale. They may also already be plugged into potential buyers searching for properties in your area.
A tax professional can also help determine how a capital gain or loss could impact your finances. If the sales price is greatly over the basis value, you could potentially jump into a higher tax bracket which could significantly impact your income taxes.
An attorney can be another helpful person to have on your team when selling an inherited house. Even if there seem to be no problems with other relatives or joint heirs in the beginning, relationships can quickly get sticky when money is involved. Working with an estate attorney protects your best wishes as well as the intentions of your deceased loved one.
Decide if an “As-Is” Cash Transaction Makes Sense
Once you have an understanding of the big picture surrounding your property, it’s time to consider all of your options for selling the inherited house. When working with a traditional real estate agent, you may receive offers from regular homebuyers. Even if they’re paying with cash, however, they may have different expectations than they would if you sell to a professional home buyer – also known as an investor. An investor is typically better prepared to make a true “as-is” offer, which is particularly important if the property is in less-than-ideal shape.
An everyday buyer, even when using cash, may end up backing out of the deal if they feel overwhelmed during the inspection process. On top of that, an investor has relationships with reputable escrow companies and other professionals to help expedite the road to closing. You’re less likely to have a deal fall through, which runs the risk of increasing your capital gains as the market continues to appreciate in Southern California.
SoCal Home Buyers is one of the leading cash investors in the local market. We focus on helping sellers of inherited property achieve their financial goals by managing fair and fast transactions.