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Selling Parents House Before Death
Parents usually leave their house to their children when they die, but is it a wise choice?
Some people think it's just as simple as being handed the keys to your parents' property but unfortunately that is not the case.
Benjamin Franklin once said that: "Nothing is certain except death and taxes."
These are facts of life that we must all deal with, and as we grow older, we have to face not just our own mortality, but our parents' as well. They aren't getting any younger, and so arrangements have to be made to prepare for the inevitable...
Death and Taxes
A parent's death is one of the most devastating events in a person's life. It is heartbreaking, not to mention physically and emotionally-taxing.
Especially when one has to deal with all the tax implications on an inherited property and a long, drawn-out probate process on top of it. An estate sale is not as straightforward as it seems, after all.
What is Probate?
Probate is a legal process that ensures the correct people get a share of a deceased person's estate, such as creditors and rightful heirs. It can take anywhere from six months to two years, and unless you are named the executor, you won't be permitted to do anything to the property until the matter has been resolved by the probate court.
Probate can be avoided, and the key to it is just planning ahead. If you are strategic about it, you can go down a route where you pay the least amount of taxes.
As a matter of fact, there are two ways you can go about it and one of them can be totally tax-free!
You can either sell your parents' house after death or before death.
Selling Before or After a Parent's Death: Which is Better?
Let's walk you through your options and see what each one entails.
1. Selling Parent's House After Death
Inheriting a property is not as simple as the movies make it out to be. It's not reality that you'll be handed the keys to your inherited house after a reading of the will when your parents pass away. There's a lot more to do such as filling out paperwork and talking legalese with lawyers.
And, unless the deceased took specific steps such as establishing a living trust or signing a death deed, then the property has no choice but to go through probate.
Selling Your Parent's House by Going through Probate
The probate process can be lengthy, overwhelming, and can cause plenty of headaches. This can be a lot on your plate especially for family members consumed with grief.
Furthermore, if your inherited property requires extensive repairs, you won't be able to do anything about it as mentioned above. This means letting the property that may have already languished fall into a ruinous state.
When you finally inherit the house, there could be a lot of work you need to do. Sometimes other heirs harbor emotional attachments to the property, so you it may take some time before you all can come to an agreement on what to do with your parent's home.
Selling your Parent's House without Probate
There are two ways to avoid probate as mentioned above: living trust (revocable or otherwise); and a death deed.
Having a living trust is the best scenario if there are multiple heirs. It is a legal vehicle which establishes you as a beneficiary with your parents as the trustee.
As beneficiary, you can choose to do what you wish with the assets as soon as you are ready. It can be revocable or irrevocable: the former is allowed to be amended within your parents' lifetime, while the latter cannot be changed.
A living trust only bypasses probate. It does not function as a tax shield, so you are still legally required to pay all the associated taxes in the sale of your parents' house.
A death deed is also known as a beneficiary deed. It is a legal document that transfers ownership of a property directly to you, as the heir, without the hassle and expense associated with probate. It is not available in every state though, and only avoids probate, not the associated taxes, such as capital gains tax.
Capital Gains Tax when Selling Parents House After Death
Waiting to sell the property after your parents' death means you get to take advantage of the step-up in basis. The fair market value of your parents home is adjusted after it is passed on to you, eliminating the need to pay capital gains tax for the appreciation in market value during your parent's lifetime after they had purchased it.
For example, your parents purchased their house forty years ago for $15,000. At the time of their death, your parent's estate is now worth $500,000. This means the fair market value is now at $500,000 when you inherit it. Say, you renovate the property to get more money from the sale, and you are able to sell it at $700,000. The capital gains tax of around 15% would apply on the $200,000; therefore, you would need to pay $30,000 in capital gains tax only if you sell within 1-2 years.
If you sell parents house after 2 years, you wouldn't need to pay any capital gains tax in the example above. Speak with a real estate attorney or professional to understand the specific tax implications in your situation.
Inheritance Tax: Selling Property After Death
Inheritance tax varies state to state. Some states don't even have an inheritance tax. Check with the local authorities in your state to verify whether you owe inheritance tax on your parents house.
2. Selling Parent's House Before Death
There are cases wherein it is necessary to sell your parents house before death, such as when you need to pay medical bills or elderly care. In any case, if your parents sell their house before death, they can avoid paying taxes.
Of course, you'd still need to consult with an accountant or an estate attorney on the specifics, but generally, here is how it goes.
Tax Consequences when Selling Parents House Before Death
- The house is not your parents' primary residence - it could be their vacation home
- The 2-in-5 year rule - meaning they lived in the property for less than two years in the five years they have owned it prior to selling the property
If your parents are married and filing jointly, they are exempted from paying capital gains tax up to $500,000 of the profits. If they are single, the exemption is up to $250,000 on the profits.
For example, if they bought the home fifteen years ago at $150,000 and sold it today at a fair market value of $650,000, they wouldn't need to pay a single cent in capital gains tax if filing jointly. If one parent has died, the surviving parent can sell the house within two years of the other spouse's death and still claim the $500,000 exemption.
Now that they have the cash from the home sale, they can gift the money to their heirs. The IRS allows someone to gift up to $16,000 annually without tax consequences. If you have a spouse and siblings, it would be easy to transfer the proceeds from the home sale since the annual exclusion applies to each individual. In addition to this, there are other ways to transfer the money tax-free, such as 529 plans for instance.
Selling your parent's house before they pass away is the only way you could avoid a lot of tax implications such as estate tax and capital gains tax. You will still pay taxes though, such as income taxes, arising from the revenue garnered from the sale.
How to Sell Parents House
Should you decide to go ahead with selling your parents' home, regardless whether you do it before or after they pass away, there are three routes you could take as long as all legal documents are in order:
- Making repairs prior to selling with a real estate agent or selling by yourself (FSBO)
- Selling your parent's house as-is on the market
- Selling your parent's house as-is to a cash buyer off-market
Read on as we discuss each of these routes:
Route #1: Repair the property then sell with a real estate agent or sell it yourself (FSBO)
If you wanted to get top dollar for your parent's home, then it is best to fix whatever issues the property may have before you sell. In the real estate world, selling property that is ready for occupancy will attract the widest pool of buyers.
Making Repairs to Parents House
The first thing you have to do after inheriting the property is arrange an inspection so you know where to start. A professional home inspector will check every nook and cranny of your parents' home to determine if everything is in order. If not, he'll tell you in the inspection report any issues you need to deal with and recommend what must be done.
Following that, you should consider your personal motivation and your finances, whether you have enough money or energy for what must be done. Otherwise, you can explore Routes #2 and #3 below.
If money for the repairs and renovation is not an issue, then by all means clean the place up, and hire contractors to begin the home repairs. Depending on the condition of the property, repairs can take weeks to months.
Once the property is returned to its former glory, or at the very least in working condition, it is now time to decide whether to work with real estate agents or go the For Sale By Owner (FSBO) path.
Selling Parents House with a Real Estate Agent
If you choose to deal with a real estate broker, they will be in-charge of staging the house for viewings by potential buyers and they will also be the one to negotiate on your behalf. They can also guide you in pricing the house properly to avoid unrealistic expectations.
Please note that this convenience comes at a price by way of realtor's commissions, staging costs, closing costs, and other costs associated with a property sale.
If you'd like to avoid paying commissions, then you can go the FSBO route. This means you have control over the entire sales process by trading off your time and energy. However, due to most sellers' inexperience, this doesn't typically lead to a higher profit.
Route #2: Sell the property as-is on the real estate market
What if you do not have the funds to undertake major repairs but still want to go ahead with selling the property? Well, you can choose to put your parent's house for sale on the local housing market as is-- either with real estate agents or by yourself.
If you go with a realtor, they can advise you on quick, low-cost cosmetic fixes that you can do to improve your home's value somewhat-- you just have to pay their fees and other associated costs.
As in Route #1 above, saving money on commissions and other financial obligations can be done if you go FSBO, but you'll have to be the one to market, stage, show, and negotiate the sale of your property.
Remember, trying to sell inherited real estate the traditional way without fixing anything runs the risk of the house sitting too long on the market. It can have unintended consequences, such that you may be forced to accept a less than desirable offer on your property, which brings us to another option for you...
Route #3: Sell your parent's house as-is to a real estate investor
Saving time, money, and energy is the primary motivation you may have in considering this route. Or perhaps, you live out of state, and dealing with the inherited property for much longer is too much of a hassle.
Whatever the case, you can choose to offload your parent's house fast by selling to real estate investors or quick sale companies that buy houses for cash, so you can move on with your life as soon as possible.
Real estate investors are either house flippers or landlords. They purposefully seek out motivated sellers such as heirs looking to dispose of their inherited property quickly.
Compared to Route #1 and #2 above, selling for cash can get you more money in the long run since a lot of time is saved. However, depending on the condition of your parents' home, you must be willing to accept a discounted cash offer in the real estate sale.
If your parents house is left unchanged and not renovated, the house is even more attractive to real estate investors though, so that's something to keep in mind. They typically buy houses at below market value since they factor in the costs of renovating and rehabilitating a property prior to selling it or leasing it out.
Since money is not an issue with them and they are not dependent on banks or mortgage lenders, they can quickly close on a sale. This frees you from the stress and the hassles of trying to dispose a potentially problematic property with money in your pocket.
Additionally, the buyer will take care of the closing costs on your parents house, so you will receive every penny that is indicated in their fair cash offer.
Considerations When Selling Parents House Before or After Death
Address Potential Family Conflicts
In the case of multiple heirs, address possible conflicts early on.
No parent wants to see their children fighting over their belongings. That's why early on, plan ahead (ideally with your parents) on how you and the other heirs would settle the estate.
Decide on the following:
- The one in-charge with preparing the house for sale
- How you would split the associated costs in the sale
- How you would split the proceeds from selling the house
- The selling price of the house
- Who would have the say in accepting an offer for the property
In the worst case scenario that you can't agree on anything, you may need to hire a professional mediator.
Be Prepared to Spend Money when Selling after Death
If the property will go through probate, you must pay for holding fees in addition to property maintenance to prevent unintended consequences (e.g. pipes bursting during winter).
Set Realistic Expectations about the Price
Run a competitive market analysis (CMA) in the neighborhood, so you can price the property accordingly. A CMA gives an estimated value of the home based on the price of the recently-sold properties in your area.
If you are working with a real estate agent, they can prepare this for you.
Final Thoughts: Selling Parents House Before Death
Selling a parent's house before death may be a sensitive topic for some people, but in terms of practicality, it is definitely worth considering. It allows you to avoid paying taxes and frees you from being entangled in probate down the line.
Selling as-is to a cash buyer is even better: you don't have to do anything with the property before selling it-- no cleaning, no repainting, less to pay in holding costs. A cash buyer allows you to sell your parents' house while having very little to do with the property.
Here at Sell My House Fast, we want to make the sales process as simple and as easy for you. We buy houses in absolutely any condition.
We have an expansive network of local buyers in every market who specialize in their local housing market so we can get you a fair cash offer for your property. This means that you'll get a better offer compared to national real estate investors. What's more, you don't have to deal with real estate agents and their commissions!
If you want to get started, fill out the form below so we can have your no obligation cash offer ready quickly. The sooner we start, the sooner we close and you can be done handling your parent's house!
Feel free to call us at (844) 207-0788 if you have questions, and we'd love to guide you through our process so it is stress-free for you.