By Akemi Kondo Dalvi, CPA/PFS, CFP
Often when a loved one passes, we mourn the loss of that beloved soul for many months or years ahead. However, in the midst of loss, there is also a heavy responsibility for beneficiaries to juggle mentally and emotionally consuming tasks such as planning a funeral service, transferring financial assets and liabilities, and disseminating the estate left behind.
If an estate is complex, this can be an especially daunting task. Inheriting real estate is a common estate settlement undertaking that can be less stressful with a few tips.
To start, examine the ownership structure of the inherited property. For example, if your mom passed away, did she leave the house titled in her name or a trust? Each state has specific rules on how such assets are transferred to beneficiaries. Generally speaking, if the family home is titled in her name, the property will need to go through probate before it can be listed for sale. For planning purposes, this can be a long and costly process.
If your parents planned ahead and left real estate in trust title, only the successor trustee is able to sell the house. For example, if your parents were the trustees, and listed their three children as successor co-trustees after their expiration, all children must agree on the sale of the property and be available to sign documents at closing. If the children don’t agree, an attorney may need to get involved.
If the estate is large enough, you may be able to equalize the estate and have one child inherit the house, and the other two children inherit other assets of equivalent value. However, seek the skill and guidance of an attorney to clearly lay out such a scenario so your parents’ wishes can be fulfilled in a fair and tax-efficient manner.
Beneficiaries should also be mindful of whether the late owner of the real estate had any debts and liabilities associated with the property. For example, if there is a mortgage on the inherited real estate, the beneficiaries will be responsible to continue payments on it until the home is sold. Some lenders require that the outstanding mortgage be transferred from the deceased person to the beneficiaries before the house can be sold and the mortgage paid off, so it’d be best to inquire with the lender in advance to avoid an unpleasant hiccup in escrow.
Continuing on the subject of liabilities, property taxes, utilities, home owners insurance, and the like will also need to be paid.
In addition to checking on an outstanding mortgage, it may be prudent to inquire if there are any liens or encumbrances on the inherited real estate. Many mistakenly think that Medi-Cal benefits are free. Sometimes, program benefits are actually a long-term loan that comes due upon the recipient’s passing.
Pretend your mother is over age 55, received Medi-Cal benefits, and her main asset was her home, titled in her name. At her passing, the Medi-Cal estate recovery program might seek repayment from the home sale proceeds for benefits received during her lifetime.i
The home should also be appraised for market value close to the decedent’s date of passing. An understanding of market value will help heirs set a reasonable sales price and facilitate discussion on the lowest offer price to accept in advance. Additionally, under current tax laws, the value of the house on the date of the decedent’s passing is the cost basis, or the taxable floor upon which appreciated value in the sale of the home will be taxed.
For example, say your mom bought her home for $100,000 many years ago. By the year of her passing, the home value appreciated to $600,000. If your mom had sold the home while she was still living, the gain of $500,000 would have been subject to capital gains taxes (less an offsetting primary residence exclusion, if applicable). However, since your mom did not sell the home and instead passed the home to her children, the market value of $600,000 becomes the heirs’ taxable basis.
If the children sell the home for $650,000, the profit of $50,000 would be the tax liability. That’s a potentially significant tax savings under our current rules. Such information is reported in the decedent’s tax filing. It is recommended you retain a formal real estate appraisal report should the IRS come knocking with questions. ii
When wrapping up an estate, consider keeping a reserve of funds in the estate name for possible liabilities that may come due in the future. In the example above, we discussed possible capital gains taxes, but other expenses may not appear until the final tax filing is completed. Depending on when your loved one passed away, their final tax return might not be filed until a year later.
If your loved one had medical bills related to their passing, it also can take many months for the hospital, medical providers, and insurance companies to invoice the estate. The last thing an executor wants to do is distribute proceeds and then ask for money back later, when the funds might have already been spent.
Another aspect of selling a family home can be the emotional component, especially if the home is associated with a lot of memories. An important step to selling inherited real estate successfully is to keep open lines of communication between siblings; it may help to discuss who will be responsible for preparing the home for sale, communicating with the realtor, and managing the related finances and tax reporting both during and after the completed sale.
Selling the home may also involve time-consuming tasks such as renovation, an estate sale to dispose of items, and dividing treasured possessions amongst family members. It may make sense for family members to tackle these responsibilities together. However, it is often the case that family members may be too busy, or too far away to help.
Many family trusts have a provision that the settler managing these tasks may be compensated for their time, just as an attorney would charge to settle the estate. While it seems petty, this can sometimes eliminate unnecessary ill sentiments about the overburden born by one sibling. However, often just gratitude and good communication can go a long way in creating family harmony to complete an emotionally tolling task.
Selling an inherited property is a complicated task that involves a lot of variables. The smoothest estate transfers take place when the original owner plans in advance and communicates their wishes transparently to all heirs so there are less discrepancies to resolve later.
Selling inherited property has a lot of legal and tax nuances, so consider enlisting the help of an estate planning attorney and certified public accountant to ensure all aspects of your financial transaction are properly reviewed. Also reach out to your Certified Financial Planner or CPA Personal Financial Specialist to be your financial sounding board and provide you peace of mind during your time of grief.
i. https://www.dhcs.ca.gov/services/Documents/ER_Brochure_Eng_0619.pdf
ii. https://www.advisorperspectives.com/articles/2024/11/11/estate-planning-essentials-beneficiarys-guide-selling-real-estate-after-loved-one-dies?topic=financial-planning
The opinions expressed above are solely those of Kondo Wealth Advisors, Inc. (626-449-7783 info@kondowealthadvisors.com), a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice.