Selling your parents’ house before they pass away is a challenging and emotional experience for all family members. However, if you plan and execute the process carefully, it’ll be less taxing for everyone involved.
Selling a house is complicated, and is even more difficult when dealing with the emotions surrounding the death of a loved one. We have created a guide to assist you in selling your parent’s house before their death.
Continue reading to learn about the financial, legal, and tax consequences of the home selling process.
Your Guide to Selling a Parent’s House Before Death
Step 1: Gather Documents
Before putting the house on the market, you’ll need to gather important documents, such as the deed, title, and mortgage or loan documents. You’ll also need to gather legal documents or guardianship papers.
Step 2: Conduct an Appraisal
You’ll need to conduct an appraisal to determine the house’s value. An appraiser will assess the condition of the house, its location, and the property market trends in the area to provide a fair sale price.
Step 3: Handle Repairs or Renovations
Address any repairs or renovations needed to maximize the house’s value. You may need to fix electrical or plumbing issues, repaint walls, or replace damaged fixtures. Remember that extensive repairs may not increase the value of the property, so check the return on investment before you renovate.
Step 4: Make Legal and Financial Arrangements
Depending on your parents’ financial and legal situation, arrangements may need to be made before selling the house. For example, if the home sale proceeds pay for long-term care, consulting with a financial advisor or attorney is essential to ensure proper use of the funds.
Step 5: Set a Reasonable Asking Price
Set a reasonable asking price that reflects the house’s market value while also taking into account any repairs or renovations made.
Step 6: Market the House
To attract potential buyers, market the house effectively. Stage the home, take high-quality photos for online listings, and advertise on real estate websites and social media platforms.
Transferring Property Prior to Death
While several options are available for property transfers, you should understand the legal implications of each. We’ll discuss different types of property transfers and their pros and cons.
A life estate is a property transfer that allows you to transfer title to the property but retain the right to use and enjoy it until your death. After your death, the property will pass to the designated heirs, who will receive the fee simple title.
- Allows the property owner to retain control and use of the property during their lifetime
- Avoids probate court for the designated heirs after the owner’s death
- Limits the owner’s ability to sell or otherwise dispose of the property during life
- Transfers the property subject to the life estate, which may impact its value
A revocable trust (living trust) is a property transfer that creates a separate legal entity to hold the title to the property. The trust owner (grantor) acts as the trustee and retains control over the property during their lifetime.
- The grantor retains control over the property during life
- Avoids probate for the designated beneficiaries after the grantor’s death
- Provides privacy for the grantor’s estate, as the trust is not a public record
- It’s more expensive to set up and maintain
- Assets placed in the trust may be subject to estate taxes
Joint tenancy is a property transfer that allows multiple individuals to hold title to the property simultaneously. If one owner dies, their share will automatically pass to the remaining owners, bypassing probate.
- Allows for easy transfer of ownership upon the death of one owner
- An effective way to transfer assets to a surviving spouse
- Leads to conflicts or legal issues if there is disagreement among the owners
- Limits the owner’s ability to control or dispose of the property as they wish
A gift is a property transfer that involves giving the property to another individual during the owner’s lifetime without receiving any payment in return.
- Straightforward way to transfer ownership of the property
- Reduces the owner’s taxable estate
- The owner may lose control over the property after the gift
- The gift may be subject to gift taxes
Different options are available for property transfers before death, and each has pros and cons. For the best results, you should contact an estate attorney to get specific legal advice about estate planning.
Pros and Cons of Transferring a House Prior to Death
Transferring a house before death is a complex decision. Here are some pros and cons of transferring a home before death:
- Avoiding Probate: Transferring property before death is avoiding the probate process. A transfer-on-death deed is a simple and inexpensive way for a homeowner to transfer a home upon death.
- Stepped-Up Basis: The heir may not receive the step-up if the property is transferred before death.
- Gift Taxes: Transferring a house before death reduces gift taxes, if applicable. The IRS allows for tax-free gifts up to a certain amount each year, and transferring a house before death counts toward that threshold.
- No Control: Once a house has been transferred, the original owner no longer controls it.
- Tax Implications: Transferring a house before death has various tax implications, including gift and capital gains taxes. These taxes are complicated and expensive and may require the assistance of a financial advisor or accountant.
- Financial Risks: Transferring a house before death poses financial risks for the transferor and the recipient. For example, the recipient may be required to pay taxes on the transferred property or face legal challenges related to the transfer. The transferor may also face financial risks if they must live in a different home or pay for long-term care later in life.
It is essential to carefully consider all factors and potential risks before deciding. We also recommended consulting with a legal and financial expert to ensure you meet all legal requirements and limitations during the transfer process.
Taxes When Selling Parent’s House Before Death
Selling your parents’ home before their death may have potential tax implications. These include:
- Capital gains tax: The seller may be responsible for capital gains tax on the profit made from the sale.
- Gift tax: Selling the home at a price significantly below the fair market value could result in the IRS considering it a gift to the buyer, which may trigger gift tax liabilities for both parties.
- Inheritance tax: The sale may also have implications for inheritance tax if the children inherit the sale proceeds.
The tax burden varies depending on factors such as the selling price, the state laws, and other considerations like the duration the property has been owned.
Can You Avoid Paying Capital Gains Tax On Your Inherited Property
Regarding inherited property, capital gains tax are a significant concern.
You need to understand the home’s value and basis. The value is the property’s current market price, while the basis is what was paid for it originally.
If you profit by selling the property above its original cost, you must pay capital gains tax on the difference. Conversely, if you sell it for less than its original cost, you claim a capital loss deduction.
Another strategy to consider is taking advantage of exemptions and tax incentives. If you have an inherited house that you lived in as your primary residence for two out of five years before selling it, you may qualify for a $250,000 or $500,000 exclusion from capital gains tax (depending on your filing status).
Additionally, certain investments may be eligible for special tax treatment, such as deferring or reducing capital gains taxes through 1031 exchanges or qualified opportunity zones.
Individuals may have different strategies depending on their income level and tax bracket. For instance, someone in a higher income bracket may benefit more from deferring taxes with 1031 exchanges than someone in a lower income bracket who would likely pay less overall by paying the capital gains taxes upfront.
In summary, there are many ways to avoid or reduce capital gains taxes on inherited property depending on your situation and goals. Research all available options carefully and consult a financial advisor before deciding how to handle your inheritance.
Selling the family home before a parent’s death is complex and emotional. As we’ve discussed in this article, selling a home before a parent passes away has both pros and cons.
On the one hand, selling the home before a parent’s death alleviates financial burdens, such as medical bills and elderly care. It avoids capital gains taxes and makes the process of transferring ownership simpler.
Consider all of the factors involved in selling a home before a parent’s death and make the best decision for their situation.
For those who decide to sell before a parent’s death, it may be beneficial to explore cash buyer options. They provide a cash offer and more straightforward process with fewer complications.
Ultimately, the decision to sell a parent’s home before their passing is personal and each family should do what is best for their unique situation.