A Guide to Selling Inherited Property

Inheriting a home can bring both financial opportunity and logistical challenges, especially when multiple heirs are involved or the property must pass through probate. Selling inherited real estate may require court approval, agreement among beneficiaries, a clear valuation and careful attention to taxes and outstanding debts before the sale can move forward.

A financial advisor can potentially help you manage inheritances and other windfalls.

The Probate Process When Inheriting Property

When someone dies owning real estate in their individual name, the property may need to go through probate before it can be transferred or sold. Probate is the court-supervised process used to validate a will, appoint an executor or administrator, pay debts and taxes, and distribute remaining assets to beneficiaries.

If the deceased person left a valid will, the executor generally follows its instructions for handling the property. If there is no will, state intestacy laws determine who inherits the real estate. In either case, the court may need to formally authorize the personal representative to manage or sell the property.

Before a sale can take place, the executor may need to obtain an appraisal, identify outstanding mortgages or liens and determine whether the estate has debts that must be paid. In some states or situations, court approval may also be required before the property can be sold, particularly if beneficiaries disagree or the estate is subject to additional probate restrictions.

Not every inherited property has to pass through probate. Real estate held in a living trust, owned jointly with rights of survivorship or transferred through a valid transfer-on-death deed may pass directly to the new owner outside of probate, depending on state law.

Probate can take several months or longer, especially when an estate is complex or contested. Beneficiaries who plan to sell inherited property may need to wait until legal ownership has been properly transferred or until the executor has authority to complete the sale.

Types of Ownership and Inheritances

If a will names a single person as the beneficiary and new owner of property such as a house, stocks or various kinds of bank accounts, it simplifies matters considerably. As sole owner, the beneficiary doesn’t have to consult with joint heirs about how to dispose of the property.

Often, however, a will names multiple people as beneficiaries. Sometimes several people wind up as owners of a single asset, such as a house.

In addition to a will, another way ownership can be transferred is through a contract naming one or more people as beneficiaries. Heirs can gain title by contract to assets including life insurance policies as well as IRAs and other retirement accounts.

If the contract paperwork for a retirement account or insurance policy designates someone as beneficiary, this takes precedence over any contrary wishes that might be expressed in a will. That’s why it’s generally advised to stay up to date on beneficiaries named on these contracts, to avoid assets going to someone the deceased didn’t intend.

How Inheritance Taxes Come Into Play

While the federal estate tax only applies to estates larger than $13.61 million in 2024, the act of selling inherited assets, including real estate, can trigger taxes.

This only happens if the asset is sold for a gain, however, and many heirs can avoid paying taxes on much of the proceeds from selling inherited property. The IRS allows the value of a deceased person’s property to be stepped up to its fair market value on the day they die, rather than whatever it was when the property was acquired. So, if a home was bought 20 years earlier for $100,000 and is now worth $500,000, its tax basis will “step up” to its current market value of $500,000.

If an heir sells the property, he or she will only owe taxes on the amount received in excess of the basis. So if the heir in the example above sold the inherited house for $500,000, no taxes would be owed because there was no gain. If the house was instead sold for $600,000, taxes would potentially be due on the $100,000 increase in value above the basis. The same step-up process is used when other assets, such as securities, are inherited as well.

Any gain is subject to capital gains taxes. There are two types of capital gains: short-term and long-term. Short-term capital gains are generated when assets are sold after being owned for less than a year. The tax rate on short-term capital gains is the same as the ordinary individual income tax rate, which ranges from 10% to 37% depending on income.

Sales of assets held more than a year are subject to long-term capital gains taxes. Long-term capital gains taxes can range from nothing to as much as 20%, depending on the tax filer’s personal income and filing status. Higher-income filers usually pay more.

There is a significant tax break associated with capital gains derived from the sale of a home, though, which may apply to people who inherit a home. If the home is your primary residence, the IRS allows you to exclude the first $250,000 in profit from capital gains taxes ($500,000 for married couples who file a joint tax return). However, you’ll qualify for this exemption only if you live in the home for two of the previous five years before selling the property.

Getting Agreement From All Heirs

Selling inherited property can become more complicated when multiple heirs share ownership. If the property has already passed to the heirs, everyone with an ownership interest may need to agree to the sale and sign the necessary documents before the transaction can move forward.

Disagreements often arise over the timing of the sale, the asking price or whether the property should be sold at all. One heir may want immediate cash, while another may prefer to keep the home, rent it out or wait for property values to rise. Establishing a fair market value through an appraisal can give everyone a neutral starting point for negotiations.

Heirs may also consider alternatives to selling the property outright. One beneficiary could buy out the others’ ownership interests, or the group could agree to rent the property and divide the income. Any arrangement should account for expenses such as mortgage payments, property taxes, insurance, repairs and maintenance.

If the heirs cannot reach an agreement, legal action may become necessary. In some cases, an owner can ask a court for a partition, which may result in the property being divided or sold and the proceeds distributed among the owners. Because a forced sale can add legal costs and reduce everyone’s control over the outcome, reaching a negotiated agreement is often preferable when possible.

Bottom Line

Property inherited from a deceased relative can be sold and turned into money for the heir or heirs. The disposition of an estate can take months, even years, and during that time homes or other assets may have expenses like taxes, utilities, maintenance and other necessities. In addition, heirs often have to consider the cost of needed repairs before deciding whether to keep an inherited residence or sell it. In addition, if more than one heir is named as owner of a property, the beneficiaries have to come to agreement on how the property is to be handled.

Tips for Handling an Inheritance

• If you’ve inherited a home or other asset from a deceased relative, consider consulting with an experienced financial advisor before deciding on a course of action. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• State laws on property taxes can be complicated so using a free property tax calculator can make the job of paying those taxes easier.

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