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At any age, losing a parent is heartbreaking. It’s the kind of traumatic life event when you’d most like to turn to your parents for comfort and advice if only they were still with you. To make matters worse, you must deal with the headaches of settling your parents’ estate while you’re grieving.
You have a long to-do list if you need to sell a house inherited from your parents. However, you can reduce some of the stress by working through the process step-by-step:
Establish the status of your parent's estate
Identify the estate executor and notify all interested parties
Handle inheritance disagreements before they become full-blown disputes
Hire an agent experienced in selling inherited houses
Sort through your parents’ finances
Review the home’s insurance policy
Secure the house
Understand the tax implications of selling your parents’ house
Dispense your parents’ personal property
Prepare the house for sale
Set the list price and sell the house
Step 1: Establish the status of your parent's estate
Most adult children know they’ll inherit their parents’ home one day, but too few understand precisely how the house will pass into their hands. You need to know your parents' steps to give you ownership of the inherited property before even considering selling the house.
There are primarily three ways to inherit a house from your parents: through the probate process, a transfer on death deed, or a living trust.
Probate
Many families mistakenly believe inheriting property is as simple as listening to an official reading of their parents’ will. That may work in the movies, but real estate inherited via a choice is usually subject to the long, complex probate process. And if your parents didn’t leave a will, then probate is pretty much a given.
So, what is probate?
Probate is a court-supervised process that oversees the dispensation of your parents’ entire estate, including the house sale. This is done so that the proper people are granted the right to and responsibility for the estate and so that your parents’ debts get paid as part of the process.
While probate laws vary from state to state, expect the complex process to take a while, from several months up to a year or two. Depending on the rules in the state where your home is located, the courts may play a role in when and how the home is sold during probate. So be sure to do your probate research and enlist the help of a probate attorney.
Transfer on death deed
There is one way for the ownership of your deceased parents’ home to transfer to you as quickly as it does in the movies: the transfer on the death deed. Also known as a beneficiary deed, this type lets you inherit the property directly and immediately without probate’s time, hassle, and expense. With this type of deed in place, you can sell your parents’ home as soon as you’re ready.
However, this deed type is only valid in certain states. The laws governing these deeds vary from state to state, too. For example, in some states, all you need is a completed transfer on the death deed to avoid probate. In other states, your parents must also bequeath the property to you in their validated will, or the transfer on the death deed is rendered meaningless.
Michigan does not allow real estate to be transferred with transfer-on-death deeds. A type of deed is available in Michigan known as an enhanced life estate deed or "Lady Bird" deed that functions like a transfer-on-death deed.
Finally, while you can avoid probate with a transfer on the death deed, you will still need to pay taxes on the house when you inherit it this way (more on this later).
Living trust
Selling your parents’ house is much simpler if you’ve inherited it via a living trust, a document designed to streamline managing and inheriting your parents’ assets. The document names your parents as the trustees (allowing them to manage all assets while still living) and you as the beneficiary.
A trust is usually the best scenario when there are multiple heirs, and the document dictates which heir makes the decisions regarding the house sale. If you inherit property with a living trust, you can bypass probate, avoid some estate taxes, and set yourself up to sell the home immediately.
Step 2: Identify the estate executor and notify all interested parties
Before you can sell the house, you need to identify all the heirs and find out which one is the named executor or personal representative authorized to make decisions about the home sale. If your parents’ will or the probate court has appointed a personal representative (or executor or administrator), that person typically calls the shots when selling your parents’ home.
The heirs aren’t the only parties interested in dispensing your parents’ estate. Creditors must be paid if the parents owed debts when they passed away (see Step 5). It’s the personal representative's responsibility to notify their deceased parents’ creditors and pay those debts, often with some of the proceeds from the sale of the house.
A single decision-maker is a best-case scenario when selling a house as part of an estate settlement with multiple heirs. However, in some cases, no such decision-maker is appointed (or named by the probate court), which means all heirs will have an equal say in when and how the house is sold. When all heirs have an equal say in what happens to the house, it can result in years-long legal battles and costly attorneys’ fees.
Step 3: Handle inheritance disagreements before they become full-blown disputes
You’ll need to address potential points of conflict early to save yourself and your siblings’ time, money, and stress throughout the home sale process, so sit down together and decide on all of these details:
Who’s responsible for preparing the house for sale?
Who’s funding the home sale expenses, and whether it will come from the estate?
How will you split the proceeds?
How much is the house worth?
Who will give the go-ahead to accept an offer?
Your best bet is to list out every heir’s duty during the estate settlement and agree on a fair division of the proceeds, even if it’s not equal. If you can’t agree, you may need to enlist the help of a professional mediator.
Step 4: Hire an agent experienced in selling inherited houses
One way to avoid inheritance disputes and the need for a professional mediator is by hiring a real estate agent that both heirs like and trust. You also need to ensure that the agent has probate or inherited property sales experience. In addition to having expertise in selling an inherited home, you will want an agent with empathy and patience during this sensitive time.
The agent you hire also needs to reside in the same city where your deceased parents’ home is. An out-of-state agent won’t be licensed to sell real estate in your parent’s home state, and they won’t have access to the local MLS to pull accurate comps when pricing the house.
Step 5: Sort through your parents’ finances
You inherit the property’s debt and ongoing bills with your parents' house. If you don’t keep up with those finances, you could further complicate the home sale process.
You first need access to your parent’s bank accounts, which may take some work if you don’t already jointly own the interpretation or aren’t named as a payable-on-death beneficiary. You’ll also need access to your parents’ monthly bills — especially those related to the maintenance of the house. So, you’ll need to arrange to have your parents’ mail forwarded and find their login information for any online accounts. If your parents’ bills will be paid automatically with a direct debit, you’ll need to ensure enough money in their account to cover those charges until the house sells.
Your real estate agent can help you determine if there is an existing mortgage, who it is being paid to, and how it is spent. They can also have a title search run. Sometimes, a deceased parent’s home will have liens or judgments attached to the property, such as taxes that are in arrears, a home equity line of credit, or a reverse mortgage. In that case, you may need to complete a title search to identify and address those financial issues.
You also need to notify the creditors of your parent’s death. You may need to submit a copy of your parent’s death certificate(s) to these creditors, the credit bureaus, and the Social Security Administration.
Here’s an essential list of accounts and bills to keep an eye out for when sorting through your parents’ financials:
Income and retirement accounts (checking and savings accounts, 401K, CDs, etc.)
Personal and property tax records
Mortgage payment records
Home Equity Line of Credit (HELOC)
Reverse mortgage statements
Utilities (water, electricity, sanitation, etc.)
Medical bills
Credit card statements
Insurance policies
Communication services (landline, cell phone, internet service, cable TV, etc.)
Household service expense records (gardener, housekeeper, home healthcare, etc.)
Homeowners Association payment records
Once the house sells, you can close out those accounts and stop paying those bills. You’ll need to keep making payments (although you can cancel some services, like cable and internet, right away).
Step 6: Review the home’s insurance policy
You may have to change the home insurance policy if your parents’ home is vacant until it sells. Since an empty home has a higher risk of break-ins and vandalism, most insurance companies will not cover this type of damage unless you have a vacant home insurance policy. If you come across a home insurance policy that your parents were paying for directly, contact the company immediately to find out what you need to do to obtain a vacant home policy until the house sells.
Step 7: Secure the house
Settling a parent’s estate could take time, and a vacant house could become a target for burglars or vandals. Along with ensuring that you have the proper insurance, you may want to consider taking steps to secure the property before you sell it.
Set aside important documents.
Locate and secure financial and legal documents, including asset statements and life insurance policies. This paperwork may be valuable for settling your parents’ estate.
Lock away valuables.
Work with the other heirs to identify and secure any valuables. Be mindful of potential disputes by documenting what items you locate and where you store the valuables.
Regularly pick up mail.
An overflowing mailbox could attract mail theft and notify thieves that the home isn’t occupied. If it isn’t convenient to make frequent pick-ups, the post office can hold mail for 30 days. Or you could forward the mail to a different address.
Change the door locks.
Over the years, trusted service providers, friends, and neighbors may have obtained copies of the keys while assisting around the house. While it’s unlikely that a keyholder harbors ill will, you may prefer to limit access to the home. If anything turns up missing or damaged, you’ll know who’s had access to the house.
Check that doors and windows are locked.
Trespassers may see an unlocked door or window as an open invitation. In addition to checking locks, installing a wooden dowel rod into every window and sliding door track can be an inexpensive deterrent.
Set up a security camera.
If you can’t check on the house for long periods, remotely setting up a security camera allows you to monitor the property. You’d need to continue internet service to access a live feed of the property for periodic check-ins. A security camera with motion detection and recording can notify you of unwelcome visitors.
Step 8: Understand the tax implications of selling your parents’ house
The government expects a chunk of your income, including the proceeds from the sale of your deceased parents’ home. Potential tax implications include capital gains and estate taxes. Always consult your attorneys and tax professionals to review any tax implications before selling your parents’ house.
Let’s take a look at the taxes that come into play when you’re selling inherited real estate:
Inheritance and estate taxes
Inheritance and estate taxes are two similar taxes on inherited property that differ in how they get paid and to whom. An estate tax is a federal tax against the total value of your parent’s estate, which must be assessed and paid before any remaining proceeds are distributed to the heirs. An inheritance tax is a state tax you (the beneficiary) pay to the state on the profits you inherit once your parents’ estate is settled.
The terms inheritance tax and estate tax are sometimes used interchangeably on the state level, depending upon the wording of your state’s laws. At this time, less than one-half of all states have an inheritance or estate tax. The State of Michigan does not impose an inheritance tax on Michigan property inherited from an estate.
Capital gains tax
The capital gains tax applies to the dollar amount difference between the purchase price of a house and its final sold price. By this definition, any money you make from selling your parent’s house after they die is technically taxable via the capital gains tax code.
Fortunately, a tax break or loophole is known as a step-up in basis can significantly reduce the amount that qualifies for the capital gains tax. The step-up basis sets the valuation of the inherited property at the date of death value rather than your parents’ original purchase price. So, you’re only required to pay capital gains on any proceeds above the date of death value.
Consider this simplified example:
The house your parents purchased for $80,000 decades ago is now worth $280,000. If your parents sold the home before they passed away, they would be required to pay capital gains on that $200,000. (Although they would be eligible for the home sales tax exclusion.)
However, you’re inheriting the property at that $280,000 value—which means you’ll only need to pay capital gains on any proceeds above that inherited value amount. So, if you sell the home for $300,000, you’ll only need to pay capital gains of $20,000. If you sell it for $280,000, you won’t need to pay any capital gains tax.
And if you sell it at a loss, you’ll be eligible to apply a capital loss, assuming it was sold at fair market value in an arm’s length transaction, meaning you didn’t sell it to a relative at a discounted price.
Step 9: Dispense your parents’ personal property
Once you sort out most of the legal and financial issues, you’ll need to go through and dispose of the contents of your parents’ home before you can list the property for sale. When you’re selling your own house, this process is known as decluttering. However, things get more complex when selling your deceased parents’ house.
Distribute what’s owed to heirs.
First, you must find and dispense any personal property your parents have bequeathed to other heirs. So, if you’re the personal representative, you’re responsible for getting the china cabinet to your sister and your grandfather’s watch to your uncle if that’s what the will says to do. Depending on state laws, the probate court may need to be involved. You may need to inventory all property for the courts before distributing anything.
If there is no named executor or personal representative, it’s up to you and the other heirs to decide what happens to the contents of the house. This can get tricky, especially if multiple heirs want the same item. If you can’t resolve it, you may need a mediator to handle your parents’ personal property and the home sale decisions.
Clear out the rest of the house with an estate sale.
You'll likely still be left with a houseful of stuff once you’ve dispensed the oversized ticket items and cherished possessions. If yours is like most families, you’ll hit a wall where you want to toss it all to finish the job. However, an alternative might net you a little extra cash: have an estate sale. Estate sale companies can orchestrate the sale of your parents’ unclaimed personal property so you can get a little money for those items.
An estate sale or an auction may also be your best option to solve personal property disputes between bickering heirs. If an agreement cannot be reached over who gets what, put the item up for sale and let the best bid win.
Step 10: Prepare the house for sale
Once you’ve emptied the house, the inherited home sale works like any other.
You’ll need to give the house a deep clean inside and out, and then you need to decide whether or not to invest money into making any necessary repairs. If no one has updated the kitchen and bathrooms since the 1980s or earlier, you may want to spend a little cash on sprucing those areas up — but only if your goal is to get top dollar for the home. However, prepping to sell your parents’ house while still mourning may leave you little energy to do much more than clean the place and maybe repaint the walls.
Selling your parents’ house as-is and getting a little less for the place isn’t necessarily bad, especially if selling at or under the fair market value helps you avoid a hefty capital gains tax. Plus, the disclosure rules are more lenient for inherited properties because you were never the primary resident, so you have no first-hand knowledge of any issues it may have.
On the other hand, if you know that your parent’s home has significant issues that will be expensive to fix and you don’t disclose them, you may be liable to cover those repair costs. Your liability depends on how you inherited the property and if you sold it as the owner or personal representative of your parent’s estate.
Some states have specific requirements for disclosing a death on a property. For example, California requires that sellers disclose whether any death occurred on the property in the past three years. In other states, such as Arizona and Georgia, the law expressly excludes the need to disclose a death. Consult with a legal professional in your state if you’re unsure about your state’s disclosure requirements. Under Michigan law, real estate agents aren't obligated to disclose whether the property was suspected of having been the site of a homicide, suicide, or illegal activity, "which had no material effect on the condition of the real property or improvements. On the real property."
Step 11: Set the list price and sell the house
It’s not uncommon to have unrealistic expectations of your parents’ home value, with sentimentality clouding everyone’s judgment and grief putting everyone on an emotional rollercoaster. You will need to let the market dictate the list price of your parents’ home rather than your personal opinion.
When you’re ready to list the house for sale, your agent will pull together a comparative market analysis (CMA) that estimates the house's fair market value based on the prices of recently sold homes (comps). However, the comps aren’t the only numbers that matter when selling an inherited property.
Weigh your tax liability.
When selling your own home, getting top dollar is a top priority. But when setting the list price for an inherited house, you need to consider the tax implications of any home sale proceeds. If you sell at or under the comps, you may make more money in the long run if that helps you avoid paying capital gains tax. Selling for a little less may save you money if it allows the house to market sooner.
Remember, time is money.
You’ll be shelling out money to cover the bills for the house every month you continue to own the home. The sooner you sell it, the less you pay in operating costs. And you don’t want buyers to view a dark, unlit home because you forgot to pay the power company.
The clock is working against you, so the faster you make decisions and the more realistic you can be about price and preparations, the better off you and your family will be during this stressful time.
I'm happy to talk with you if you want to learn more about selling a loved one’s estate. You can reach me through the links on the right side of this page or contact me directly at (734) 623-9442, dani@danihallsell.com.
Dani
Source: HomeLight.com
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