So, you inherited a house after the passing of a relative or loved one. If you’re not prepared to manage it, inheriting a house can lead to serious responsibilities that could cost you money and time.
Some people understand and are ok with their new obligations and enjoy new projects.
For others, owning two properties is too much hassle.
If you’ve decided it’s best to sell your inherited house, this comprehensive, step-by-step guide, will help you with everything you need to know about selling an inherited house in Southern California for the best possible price with the least amount of hassle.
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Can you sell an inherited house?
Yes, you can!
However, this type of sale attracts certain conditions, costs and differences in taxes.
You’ll learn about these below:
Evaluate the property’s costs
Before selling, you need to know if the property has any debts. You also want to know if the property needs repairs or expenses that could decrease its value.
Essentially, the things you need to consider are:
- Home loans: Does the house have a mortgage or a home equity loan? (This will affect how much you make from the sale.)
- Tax liens: If the former owner owes property taxes or has other tax obligations, you’ll need to cover these costs as part of the sale – or pay out of pocket.
- Property damage: Significant property damage can make it hard to sell the house directly to another family. But you might be able to sell it as is through a real estate agent or investor.
You can still sell your inherited house if the late owner owes money on it. You’ll just need to consider that in the asking price of the property.
The “Legal Sale Executor”
In the best-case scenario, your late relative appointed you as the executor in their Will. This means you’ll manage the estate until you meet all financial obligations and satisfy all taxes.
The Executor doesn’t have to be an heir of the deceased either.
California gives you a lot of freedom when choosing an executor, which can be anyone who is:
- At least 18 years old and of “sound mind.”
- Unlikely to mismanage or neglect your estate.
- Able to travel frequently to the property’s location.
If your relative doesn’t have a Will, the state will appoint an executor.
Smaller cases – such as estates worth less than $150,000 – don’t have to go through the probate process (you can find out more about this process below).
These use an informal representative rather than a court-appointed one. The state usually selects the surviving partner or any of their children as informal executors.
Going through Probate
The probate process is a technical term for the legal process a property goes through when the owner passes away.
California’s probate process manages key aspects of your late relative’s estate, like:
- Verifying if the Will is still valid – if one exists
- Determining all heirs and beneficiaries
- Calculating the value of the estate
- Satisfying any remaining financial obligations
- Transferring property and assets to the heirs
The Executor, manages the probate process with the court’s supervision.
You’ll have to be patient though!
This process can take anywhere from nine months to one and a half years.
Should you sell your inherited house?
Inheriting a property expands your investment portfolio by giving you something of value to sell.
However, maintaining that house can be a full-time job for some people.
If that’s not something you want to deal with, the choice is obvious.
Selling vs. Renting
If you don’t want to keep a house you’ve inherited, you have two options: sell or rent.
Both have advantages and disadvantages.
Selling an inherited house
Selling an inherited house, especially if you’re selling it “as is,” can be a quick transaction – you can receive an offer, close and be on with your life in as little as a week.
Renting, on the other hand, is a long-term commitment. You might not see a profit for months.
Renting it out
Renting out your inherited property means two things:
- Monthly income from your tenants;
- You’ll have property management costs
If you choose to sell your house, however, you’ll receive a lump sum at once.
Location, Location
Another thing to consider when choosing to sell or rent out your inherited house is your location.
If you live close to the property, you might be able to manage it if you rent it out.
However, if you live in another state or country, renting out can be frustrating because you’d have little oversight over the house – so, it might be best to sell.
We work with many out-of-state owners that are simply tired of owning out of state property.
What are the tax implications?
Luckily, the state of California doesn’t have estate taxes or inheritance taxes!
This means you don’t have to pay taxes because you inherited a property.
However, there are other taxes on selling an inherited house, like:
- Capital gains tax: This is a federal tax, and it’s not easy to get out of it. If you sell the house, you’d be responsible for any taxes on the “profit” – also called capital gains – you receive based on the value of the house when you inherited it.
- Property tax: Your property tax is set at the county level, though there are guidelines from the California State Board of Equalization. You’re not responsible for any property taxes after selling, but you should expect the buyer to factor it in their buying decision.
- Tax exclusions: The government has a special tax rule for people who sell their houses. This rule allows you to sell a primary residence that you’ve lived in for the past two years to avoid paying the capital gains tax. While you won’t get this exclusion, you’ll benefit from the “stepped-up basis” (continue reading for more on this).
Any taxes you don’t pay might result in a tax lien against the property, which can limit your options for selling an inherited house.
However, the right real estate agent or investor can help you with that.
Capital gains and Losses
When you sell inherited property, you’ll either make a “capital gain” or a “capital loss.”
If you receive a capital gain, you’ll owe taxes on this amount.
If you take a capital loss, you might be able to write it off come tax time.
The formula for capital gains and losses is:
Sale price – inherited property value = capital gain or capital loss
For instance, if your relative bought the house for $125,000 in 1960, and the house was worth $300,000 when they left it in their Will.
Say you sold the house a year after you inherited it for $310,000. You’ll only pay capital gains tax on the $10,000 you made between when you inherited the house and when you sold it.
If you sell the inherited house at a loss, you might be able to claim a capital loss. This might lower the tax implications of selling an inherited house.
However, it’s better to talk to a tax advisor to make the most of your taxes.
Can you avoid capital gains tax?
There are two types of capital gains taxes: short-term and long-term capital gains.
Long-term gains have lower tax rates.
While you can’t escape taxes, you can reduce what you might owe with these tips:
- Sell your inherited house at least a year after inheriting it to pay the lower capital gains tax.
- Offset your capital gains with any capital losses in your investment portfolio.
- Try to sell the house when your income is lower to qualify for lower tax brackets.
Of course, if you plan to live in the house you inherited, you can avoid the capital gains tax by making the house your primary residence.
Then you can sell it within five years and avoid the capital gains tax.
Voila!
What does “Stepped up Basis” mean and does it matter?
When the IRS needs to know how much tax to charge on an investment’s profits, they need a starting point for the cost.
That’s the “basis,” or what you paid for the investment.
You calculate capital gains on property on a “stepped up” basis, which means the starting point for your inherited house is when you inherited it rather than when your relatives purchased it.
Remember the example earlier about your relative’s house?
The “basis” is the $125,000 they originally paid for the house, but the “stepped-up basis” is the $300,000 property value when you inherited it.
Instead of paying capital gains on $185,000, you’ll pay it on the $10,000.
Hopefully this makes sense! 😀
You’ve decided to sell – now what?
Selling any property is a big decision. Especially a family heirloom, like your parents home or the one you grew up in. If you weren’t prepared for this, it can seem daunting and will be emotional.
Fortunately, the process is easier than it sounds, especially if you work with the right real estate agents or investors.
Preparing to list and sell the house
How you prepare your house to sell depends on your approach.
If you plan to sell it directly to a home buyer rather than an investor, you’ll want the property in top condition. This can be expensive for some homes that require complete rehabs though.
This includes checking its structural integrity and internal living conditions, like:
- Whether the roof has been updated in the last 10 years
- Damage to the foundation
- Whether the kitchen has been updated in the last 10 years
- If the AC/Heater have been updated in the last 10 years
- Water / Plumbing / Mold Damage
- Condition of the windows
You’ll also need to focus on its aesthetic appeal and functional convenience, like:
- Increasing the property’s curb appeal through small home improvements.
- Opening up the house so it appears welcoming to interested parties.
You’ll also need to check appliances and deep clean each room.
It’s a long list.
Should you sell the house “As Is”?
Preparing to sell a house usually comes with at least a dozen chores, but you might be able to skirt them by selling it “as is.” That means you won’t have to invest time and energy in boosting the curb appeal, cleaning the property or forking out thousands in repairs!
If you don’t live close to the house you’ve inherited – or you just don’t want to deal with a lengthy sales process – you might find selling “as is” a convenient option.
“As is” conditions mean you can receive an offer without putting in the extra work to prepare for routine showings.
In some cases, you can have an offer and close within a week.
This can also be a cost-saving option if the property has extensive damage which is fairly typical with inherited houses.
Should you renovate?
House renovation projects have spawned an entire television network, and for good reason – these improvements can enhance the value of your property significantly.
However, if you’re trying to sell an inherited house, you might want to think twice about doing major renovations.
The average cost of remodels
The average cost to renovate or remodel in Los Angeles, for instance, is between $100 and $400 per square foot.
A modest 1,800 square foot home could cost at least $180,000.
If you inherited a house with no mortgage and have access to cash for these improvements, you can see a return on investment of almost 100% on some renovations.
However, given the current market condition this may not be the case for much longer.
However, if you don’t have the money to renovate the house – or you don’t have time to deal with renovating a house – it might be a good call to sell it as is.
Some might consider home improvement loans, but they just pile on your expenses.
Clearing out personal belongings
Cleaning out a late loved one’s home can be challenging, especially if you were close.
However, this experience gives you the chance to keep things with sentimental value. You’ll also be able to figure out what you need to sell or get rid of.
This can be a difficult experience for some people.
Approach it delicately to avoid family conflicts.
Maintaining the house
Whether you’re trying to sell the property through a real estate agent or you want to sell it as is to an investor, you’ll still need to maintain the property until it’s sold.
These are some of the important things you need to do during this period:
- Regulate airflow through the house so it doesn’t absorb musty smells.
- Clean out anything that can entice rodents to the uninhabited property.
- Remove moisture sources to prevent the growth of mold.
If you’re showing the house, you might need to keep the utilities connected until you receive an offer.
This is another aspect of maintenance – and an added cost – you need to consider.
Pricing and negotiation
Unless you’re a realtor or real estate investor, you likely don’t know how to “price” your house.
It can be even trickier when you’ve inherited property that you don’t spend a lot of time in.
So what should you do?
Determining a reasonable price
The first thing you need to do is to get an estimate of your inherited house’s market value. You can get these estimates through several credible sources. These sources use information from public records and the current real estate market conditions.
The next thing you should do is review the asking price for similar houses in your area. Location is key here – the same houses in San Bernardino and Riverside will have different asking prices.
The last thing you can do is talk with a real estate agent or investor. The right partner can help with an asking price for the most offers.
Negotiate like a pro
There’s a reason most salespeople seem to have similar personalities – selling requires a delicate balance of giving just enough to encourage a buyer to buy from you and standing firm to avoid losing money.
While you might need to consider low offers, you should open with an asking price that gives you room to negotiate.
Price your inherited house based on the most recent market value estimates so you can confidently reject lowball offers.
Consider getting your inherited house professionally appraised if you want an accurate value of where to start.
Selling your inherited house
Whether you market your home to an individual or a real estate investor, you’ll need to do certain things before you can formally sell your inherited house:
Preparing for an inspection
While it varies from county to county, in Southern California your buyer has around two weeks to complete the property inspection once they enter into escrow. The buyer will pay for the inspection, but you’ll need to make sure the property is ready for inspection.
If you’re selling the house as is, the property inspection might be mild because you’re not doing any repairs. However, if you want the best offers and don’t want to sell it as is, you can schedule a property inspection to uncover damages that could reduce your house’s value and lower your offers.
Settling conflicts with family
When a family member passes, emotions in the family often run high. This can drive a wedge between families if the deceased didn’t will anything to a certain relative or if there is a lengthy battle over selling an inherited house.
Fortunately, these simple tips can help prevent conflicts:
- Appoint a neutral party to act as a mediator.
- Sell assets to equally split the cash.
- Establish open communication.
While there’s always room for conflict, you can reduce the emotional stress on your relatives by working with them to find the best solution for everyone.
Hiring a credible agent or investor
Your real estate agent or investor is your partner in this process – that’s why you want one you can trust. Read reviews from people who’ve sold their homes through them so you can know their concerns (if any).
Then spend some time talking with each agent to see if you connect.
You want to find out how well they understand the real estate market in your property’s location.
You also want to get a feel of how they will interact with you.
What to expect after selling
Selling an inherited house is a lengthy process.
It doesn’t end when you receive the cash either.
That said, there are a couple of things you’ll need to do to wrap up the sale after accepting an offer.
Settle remaining expenses
The sale of your inherited house should cover any outstanding mortgages or home equity loans.
It’ll also take care of any outstanding tax liabilities on the house.
Besides these, there might still be expenses you’ll have to pay for, like opening utility accounts or commissions to the real estate agent if you go that route.
You’ll need to settle these as soon as possible to prevent issues for the new owners or the real estate investor.
Report your profits to the IRS
The last thing you need to do to “close out” the sale process is to report your profits.
This is where you’ll report the capital gains or capital losses we spoke of earlier from the sale of your inherited house.
After filing this information on your taxes, you’ve officially sold your inherited house!
Final tips for selling an inherited house
It can be overwhelming to sell an inherited house.
This is either because it takes time to sell it or the emotional weight of losing a relative – or both.
You can make the process less difficult with these key tips:
- Determine whether you want to renovate or sell “as is.”
- Choose a real estate agent that is credible and committed.
- Sell at the perfect time to lower your tax obligations.
With the right real estate team, you’ll have the needed tools and resources to get the best offer for your inherited house.
Do you need to sell an inherited house quickly in Southern California? SoCal Home Buyers can put cash in your hands in as little as seven days!
If the property you inherited is in need of a lot of work, or is out of state give us a call and let’s talk! We’d love to see if we can help out your situation.
Call Now: 951-331-3844
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We buy houses from homeowners that need to sell inherited property in Los Angeles, Riverside, San Bernardino, San Diego, and Orange County. You can either fill out our online form below or give us a call at: 951-331-3844 to find out how we can help you with selling your inherited house today!