Selling an inherited house in California isn’t as straightforward as selling your primary residence. Not only are you dealing with the passing of your loved one, you also have to understand a different set of laws and taxes.
In this guide, we’ll walk you through everything you need to know to sell an inherited property with the least amount of hassle, so you can move on with life stress-free.
Step 1: Know the Condition of the Property
The first thing you need to do, is determine what condition the home is in so you know your best approach to selling it.
If the person you inherited the property from lived in it, the home may already be in good shape. This type of home is best sold on the MLS.
If you inherited a home from someone elderly or ill, the home may need some work or upgrades. If you can afford the work, either listing with an Agent or selling direct for cash is an option.
If this is a vacant property that’s been vandalized, one that needs lots of work or was occupied by a hoarder, selling it in ‘as-is’ condition to an Investor is often the best approach.
1. How to determine any repairs or upgrades you need
Do a tour of the property, and keep a pad and pen handy. Focus on the major things at first and work your way down to the smaller stuff.
You’ll want to make sure the kitchen, roof, AC/Heater have been replaced or updated in the last 10 years.
You’ll have an easier time selling when these areas are up to date since they’re among the most costly to repair and upgrade but add the most value.
Next, check the plumbing, the windows, the flooring, signs of mold damage or water damage, and how level the foundation is.
As long as these things are in good condition, and the home only really needs some carpet cleaning, paint and minor repairs, you will be best off hiring an agent and selling on the market.
What if these areas need repairs or upgrades?
If these areas need work, or haven't been updated in the last 10 years, this can change your situation.
If you can pull a budget together for major repairs (kitchen, roof, AC/Heater) you’ll improve your chances of moving the property quicker. It's important to make sure you're not overspending and will get your investment back on resale.
If you can’t put together a budget, that doesn't mean you can't sell.
In cases where repairs/upgrades are too costly, or you don't want to spend the money to fix the home, selling your house to a credible real estate investor in 'as-is' condition is the easiest solution to sell the house fast.
2. Consider these improvements if the home’s in good condition
There are tons of small improvements you can make that allow the full potential and maximum value of the house to shine through if the main areas above are in good condition. Most of these things are inexpensive, and you can probably handle them yourself.
1. Deep Clean & Paint the walls to Neutral Colors
Outside of a good deep clean, repainting walls to a neutral color can showcase the property for what it is and open it up, rather than show off the taste of the person who previously lived there.
If walls are painted unconventional colors, painting over them in light cream, tan, or beige shades will open up the space like a perfect blank canvas.
2. Clean the Carpets and Flooring
The floors should be in good shape also.
Old carpet needs to be thoroughly cleaned, and hardwood should be refinished if it’s looking beat up.
If you can afford to replace old flooring, it may be worth doing so. It can add a lot of value to the home, especially if it’s tile or hardwood. Even new carpet is an improvement over old carpets, especially if the carpet is stained or smells bad.
Remember: If any of these repairs exceed your budget, making them will not be worth it if you won't see a return on your investment.
Step 2: Have the home professionally appraised
Next, you’ll want to determine the value of your property.
With an inherited home, 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 profit.
The best way to determine the homes value is to have the home professionally appraised.
You can try this yourself, but unless you have experience doing so, your numbers will likely be way off from what they actually are.
Keep in Mind: If you’re not going to make any improvements or repairs, this will affect the price your home will be valued at. And will likely be much less than what other homes in your neighborhood are selling at.
Step 3: Assess your 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.
Learn more: Tips for Assessing the Real Estate Market
Is it the right time of year to sell?
Assuming you want to get market value for the home, you should consider the time of year when determining the right time to sell your 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 time frame when selling.
Step 4: Understand your Taxes
1. Estate, Inheritance & Federal Estate Taxes
California currently does not impose an Estate tax.
There’s also no inheritance tax to worry about for California residents.
At the Federal Level, if your home is valued at $11.18 million estate tax will come into effect. However, if you’re married, you can take certain legal steps to avoid paying estate tax up to $22.6 million.
If your estate exceeds this amount your tax rate will be around 40%.
2. Property Taxes
As soon as you obtain ownership of the property, you’re responsible for the taxes. This may seem frightening if the property has gone up in value, but you don’t need to worry – provided you inherited the house from your parents.
Proposition 13 has you covered here, and your tax rates won’t be any higher than what your parents were paying.
The first part of California Proposition 13 sums it up.
Section 1. (a) The maximum amount of any ad valorem tax on real property shall not exceed one percent (1%) of the full cash value of such property. The one percent (1%) tax to be collected by the counties and apportioned according to law to the districts within the counties.
This means that your property taxes are low, and they’re going to stay low. If you choose to keep or rent the house, the taxes will stay in this tax bracket and can’t be reassessed above 2% each year no matter what the market does.
When you inherit the house, you inherit the tax-rate as long as you fall under the exclusion of inheriting from your parents.
Proposition 58/193 has something called a “Reassessment Exclusion for Real Property Transfers”.
This basically prevents the property from being reassessed for its tax rate, as long as the child or grand-child of the original owner takes ownership.
The house may have increased in value since the original assessment – and sometimes that increase will be overwhelmingly large.
If you want to keep this house and it belonged to your parents, you may be able to afford it since you won’t be priced out by a reassessment. If you’re considering keeping the property, you don’t have to worry about exorbitant tax rates becoming an obstacle.
If the exclusion doesn’t apply to you
The taxes you pay are going to be much higher if the person you inherited from wasn’t your parent or grand-parent. If this is the case, you’re best off selling the property immediately if you don’t plan on selling your current residence and moving into the inheritance.
3. Capital Gains Tax 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 cost 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 your capital losses are more than your capital gains, you can deduct up to $3,000 as a capital loss.
Cost Basis & Fair Market Value (FMV)
Cost basis, when used to calculate capital gains, represents the value of your inheritance of your property at the time of your decedents passing.
It is generally the Fair Market Value of how much your inheritance would command if it were to be sold on the market.
Unless you have experience as an appraiser or are knowledgeable about the real estate market, it’s best to have an appraisal of the property done at the time of your loved ones passing.
Since this isn’t always possible, the best option would be to enlist the help of a Real Estate professional to provide the FMV for you. These can be either a credible Real Estate Agent or Real Estate Investor.
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.
Step 5: What happens if you inherit a house with a mortgage?
If any money at all is owed to the lender on the home, you’re inheriting the mortgage the moment you officially inherit the house. This happens when the court issues a new deed with your name on it, making you the official owner.
You’re also responsible for any liens on the property, as well as property taxes.
When you’ve inherited a home with a mortgage from a relative, you can sell that home. The money from the sale can be used to satisfy the debt with the lender without having to transfer the mortgage, and as long as your name is on the deed of that property, you’ll be allowed to keep whatever money is left over.
The only problem you might encounter with selling is the amount of time and effort it will take to find a buyer. It’s even harder if the property isn’t already highly desirable and in a great area.
If you want to sell before payments become due, you’ll need to act quickly.
Step 6: Consider Enlisting Professional Help
It can take a lot of work to sell an inherited property; from getting a real estate agent to list the property to working with a tax professional to determine the financial impact.
In some situations you may also need an attorney if you’re having problems with relatives or joint heirs who have differing opinions on what is to be done with the home.
But is hiring each of these professionals actually worth it?
Let’s take a look…
1. Real Estate Agents
Hiring an agent is probably your first thought when thinking about selling a house. In this situation you’ll need to determine if the costs outweigh the benefits.
Realtors may require several upgrades and repairs be done to a property first before listing. You’ll also have to deal with inspections, showings and long wait times to find the right buyer.
You’ll also need to fork out 4-6% in Realtor Commissions as well as paying for escrow fees and closing costs.
If any of the requirements made by a Realtor are an issue for you, or you need to sell your house faster than the average 3-4 month time-span, you may want to consider an alternative option like selling the property in ‘as-is’ condition to an investor.
Otherwise, hiring an Agent should be the first person you contact.
2. Tax Professional
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.
3. Real Estate Attorney
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 or they refuse to leave the house.
Working with an estate attorney protects your best wishes as well as the intentions of your deceased loved one.
Step 7: Determine the right sales Method for You
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.
1. Selling through a Realtor
When you think about selling a house, a realtor is probably the first person that comes to mind. Having a realtor to help you handle the selling process may come in handy, but it comes at a price. Realtors will generally take anywhere between 4% and 6% of the selling price in commission.
You need to consider the current housing market before you decide to go with a realtor. If it takes a long time to sell the house, you’ll still be paying to maintain it. Your realtor may suggest reducing the asking price, but not reducing their commission.
If the market is excellent in your area and people are willing to pay top dollar for the property, there’s no harm there.
If things aren’t moving as quickly as you’d like, your profits drop and your maintenance costs add up. You’ll have to weigh the pros and cons – you may get lucky, or you may find yourself in the hole.
Also, when selling with a realtor your buyer can back out of the deal or fall out of escrow at any time.
2. Selling with an Investor
Investors will pay you cash up front for your home, eliminating the complicated closing process. There are several benefits going through an investor. They move fast, and they pay cash. The only problem is you probably won’t get full market value for your home.
If the home is in bad shape, selling to an investor is an easy option. They’ll handle everything that needs to be done, and let you off the hook of having to put your own money into the house.
While you’re not likely to get the full asking price for your home, you probably aren’t going to get it either way. A realtor is going to take a commission, and the longer your home sits, the less money you’ll see.
It’s less of a gamble going to an investor because you know what you’re going to get and escrow is guaranteed to close.
While this isn’t the traditional way to sell, it is often a great option for anyone who just needs to sell a property as quickly as possible.
On top of that, an investor has relationships with reputable escrow companies and other professionals to help expedite closing; instead of waiting months, you can close in a as little as a week.
You’re less likely to have a deal fall through with an Investor also. With a regular buyer you run that risk as well as increasing your capital gains as the market continues to appreciate the longer it takes to sell the home.
We would love to help you sell your inherited home!
SoCal Home Buyers is one of the leading cash investors in the local Southern California market. We focus on helping sellers of inherited property just like you, achieve their financial goals by managing fair and fast transactions.
If you need to sell an inherited house we would love for the opportunity to speak with you, and see what we can offer you for your home.
Give us a call today at: 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!