How Do You Inherit Real Estate?

Most inherited real estate is distributed along with other assets as detailed in a will. A will may stipulate that you are the sole beneficiary of the real estate or that multiple heirs are to share ownership. 

Under succession law, if a Washington resident dies without a valid will, their spouse receives all their community property as well as 50 to 100% of any separate property. If they do not have a spouse, or their spouse has passed as well, each of their children will receive an equal amount of the estate. 

If there are no children, the estate goes to their parents, and if there are no surviving parents, the estate goes to any living siblings. If there are no siblings, the closest living relative becomes the heir.

 As an heir, you may have to go through the probate process to inherit real estate. Probate is the settlement of an estate under the supervision of the court. We will cover this topic in more detail in a moment.

What to Consider When You Inherit a House? 

There are several things you should consider before deciding what to do after inheriting a house. These considerations include your legal and financial responsibilities, tax implications, and the condition of the property. The wishes and economic situation of anyone with shared ownership of the inherited house may also be a crucial factor to consider. 

Tax Implications – Do You Have to Pay Taxes for Inherited Property? 

There are several financial implications to real estate inheritance, and the terminology can be confusing.

Estate duty in Washington applies to estates with a fair market value of $2.193 million or more. The estate tax is levied before the assets are distributed to heirs. The rate is 10% for amounts over the threshold and rises in steps to 20%. 

In addition to Washington estate duty, there is also a federal estate tax. As of 2020, only estates with a value of $11.58 million or more are subject to federal estate taxes. If you are a surviving spouse, you may be exempt from these taxes, regardless of the estate or inheritance’s fair market value. 

While there are no federal inheritance taxes, some states do levy taxes on inherited assets. Washington is not one of those states. However, the inheritance duty laws of another state may still apply to you as a Washington state resident. For example, according to Pennsylvania law, an out-of-state inheritor must pay inheritance duty if the decedent lived there. 

Capital Gains Tax

The capital gain tax is a crucial consideration when you inherit a house, especially if you intend to sell it. This 15% federal tax is collected on the capital gain on the home, not the selling price. 

To calculate capital gains, the IRS determines the tax basis of the home, which in the case of inheritance, is the fair market value of the house, and subtracts it from the sales price. This type of tax basis is often referred to as “stepped-up” because it is typically higher than the home was initially purchased for.

For example, Person A purchases a house in 1970 for $70,000. Fifty years later, in 2020, Person A dies and leaves the house to Person B in their will. On the date of Person A’s death, the house has a value of $200,000. 

In this example, Person A’s basis is $70,000, which is the price they paid for the house. However, Person B’s basis is “stepped-up” to $200,000. If Person B decides to sell the house immediately for $200,000, there is no capital gain, and Person B will owe no capital gains tax. 

If Person B waits for five years and sells the inherited home for $250,000, they have to pay a $7,500 capital gains tax, which is 15% of the $50,000 capital gain from the sale

Does Property Tax Increase When You Inherit a House?

In Washington, real property, including land, improvements to land, structures, and equipment affixed to structures, is subject to property taxes. County assessors assess the house, while the county treasurers collect property taxes.

 Assessors set the levy rate on the taxing district’s budget request, applicable levy limitations, and the taxing district’s total assessed value. Property taxes payable are expressed in dollars per thousand dollars of the property value that the county assessed.

A Washington resident who meets specific criteria pertaining to age and income may be eligible for an exemption or deferral on property duty. Eligible residents include:

If you inherit a house from a tax-exempt individual, the property tax exemption is not transferred. However, if you meet the requirements listed in state legislation, you can apply for the property tax exemption again.

Financial and Legal Responsibilities of Inheriting a House – Mortgage or Debts on the Property 

If the home you inherit has an existing mortgage, you have a legal responsibility to pay it, assuming the deceased did not have a mortgage life insurance policy. Any property taxes and insurance are also your responsibility until after you sell the home.

Any liens on the property will be transferred with the property. You will be made aware of any debts that were not settled during the probate process.

The lien amounts will be deducted from the proceeds of the home sale.  This also applies to the mortgage, real estate agent commission, closing fees, and other costs, if applicable. Depending on the outstanding debt obligations of the inherited home, it is possible that you won’t generate a profit from the sale. 

The lien amounts will be deducted from the proceeds of the home sale.  This also applies to the mortgage, real estate agent commission, closing fees, and other costs, if applicable. Depending on the outstanding debt obligations of the inherited home, it is possible that you won’t generate a profit from the sale. 

Conflicts – When Two or More Siblings Inherit the Property 

When you share ownership of an inherited property with your siblings or other relatives, it may result in conflict, especially if you have different financial situations or objectives. Siblings may also not agree on the various aspects of a renovation project or want to sell at all. 

If there is conflict, the best course of action is usually either to sell the inherited property and divide the proceeds according to each owner’s share, as stipulated by the will or, if one party does not want to sell the house, allow that party to buy-out the other heirs.

Is it Better to Sell or Rent an Inherited House? 

If you want to derive financial benefits from a house you inherited, you can either sell it or rent it out. Determining which option is better can be difficult as every situation is unique. 

For example, if you grew up in the house and have an emotional connection with it, you may prefer to rent it out, even if you forgo profits in the process. On the other hand, if profit maximization is your only objective, your considerations will be analytical rather than emotional. 

Pros and Cons of Selling an Inherited House

Pros	Cons
Immediate financial benefit in the form of a home sale profit	Forgoing the opportunity to receive the monthly rental income
Offsetting house’s debt obligation	Costly renovations may be necessary to get the property market-ready
Reducing financial and legal responsibilities of the inheritance	You may have to pay capital gains taxes
Avoiding property taxes and mortgage payments

Pros and Cons of Keeping the Property as a Rental

Pros	Cons
Permanent ownership of a sentimental house	Routine property and tenant maintenance
Monthly rental income	Compliance with safety codes and legislation
Opportunity to see capital growth	Monthly costs in the form of the property taxes and mortgage payment

What is Probate?

Probate is a legal process to settle an estate under the supervision of the court to prevent fraud and ensure payment to all estate creditors.

 An executor or personal representative carries out this process per the decedent’s will. If the will doesn’t appoint an executor, the court will appoint a surviving spouse or adult child as one. 

The executor has the legal authority to value all the estate’s assets, pay all taxes and debts that the estate owes, and distribute assets to beneficiaries according to the stipulations of the will. 

How Probate Works in Washington State 

Below is the probate process in Washington: 

• Filing the will along with a Petition for Probate with the Superior Court, which requests the appointment of an executor.
• The court issues “Letter Testamentary,” which grants the executor the legal authority to act on behalf of the estate.
• The executor publishes notice of the probate to notify creditors of the process.
• The executor files an inventory of the estate’s assets with the court.
• Payment of all credits and taxes takes place.
• The executor files a petition to close the probate with the court.
• The court issues an order for the distribution of the estate property to heirs and beneficiaries. 

Upon completion of the probate process, and after deciding to sell, you have to start the process of selling the inherited home. You can sell the house as-is, or you can fix it before selling.

Selling the Property As-Is

If you want to sell a probate home as-is, the process is relatively straightforward, as you don’t have to spend time or money to make improvements. This option is ideal if the property is in a market-ready condition or if a renovation project is not necessary to maximize profits. 

You may also want to sell an inherited home as-is if you want to pay the mortgage and sell the property as soon as possible. Should you decide to sell as-is, use a professional home buyer like Good as Sold Home Buyers. These buyers make a streamlined selling process possible to save you time and costs.

Fixing the Property Up Before Selling

If you want to optimize the proceeds from your home sale, the best option may be to fix the house up before selling. The renovation process depends on the condition of the house, but it generally consists of the same steps: 

1. The planning phase includes drawing up a budget and setting a timeline.

2. Installation of plumbing, electrical, and HVAC infrastructure beneath floors and behind walls.

3.  Roofing restoration.

4. Framing and drywall installation.

5. Painting all interior and exterior walls.

6.  Installing cabinets and bathroom fixtures.

7. Installing new doors and windows.

8. Installing or restoring vents.

9. Installing flooring and door frames, trims, and other finishes. 

When it comes to the sale of an inherited home, you have three options. You can sell your home through a real estate agent, to a real estate investor, or you can sell it yourself (FSBO). Each option has pros and cons, and you should consider them carefully before taking action.

Realtors

Using the services of a real estate agent is a tried-and-tested method to put an inherited house up for sale. Realtors typically have existing marketing networks as well as relationships with mortgage brokers, inspectors, and attorneys to ensure that the selling process runs smoothly. 

A competent real estate agent will show people the house, negotiate with them on your behalf, and draw up an agreement of sale, so you don’t have to. 

The drawback of a sale through an agent is that the process can take a long time. Additionally, this selling method doesn’t allow for accurate cost estimation, which can make planning difficult. The real estate agent commission will also cut into your profit. 

For Sale by Owner

You can sell your inherited home yourself. FSBO homes are commonplace as this selling method allows for significant savings, especially if you are familiar with the residential house market. You also have complete control over the sale process.

However, if you don’t have experience in the residential home industry, selling your home yourself can pose several challenges. You have to set the asking price yourself, which requires extensive market research. If you price the property too low, you lose profit, but if you set the price too high, the house will be for sale for a long time and may become overexposed to the market.

With this option, you also have to advertise your home yourself and arrange appointments to show the house to potential buyers. Drawing up the agreement of sale and navigating the legal process of selling an inherited home can be difficult if you don’t have experience in this industry as well.

Investor

Real estate investors typically buy homes as-is, which means you don’t have to worry about renovating the building. An investor will also not require a home inspection as a condition to the sale, which saves time as you don’t have to wait for an inspection report. 

Another advantage of this option is that investors typically come with cash offers, and when you close the sale, you will receive the full amount of the selling price. You don’t have to wait for the buyer to obtain financing, and they will not ask you for the first right of refusal. 

There are drawbacks to selling to an investor, with the most prominent being that you can’t expect to sell your home at market value. On the upside, you don’t have to accept responsibility for the condition of the house during the sale.

Selling the House to Siblings

To ensure fairness, many parents opt to leave fixed assets to all their children. Many people assume that their children will want to keep a vacation house or farm in the family, and they don’t foresee future issues between siblings. 

In reality, siblings often have difficulty as co-owners of the same building. For example, one sibling may live too far away to benefit from the house and may start feeling that their share is less valuable. The siblings who use the house may also stop consulting the remote ones before making maintenance or improvement-related decisions.

In these cases, structuring a buy-out is the natural option, especially if one sibling prefers cash to partial ownership.

Pros

Selling your share to your siblings is the best option if the other siblings have the means to buy your share. Additionally, if you are no longer a co-owner, it allows your siblings to make decisions about the property without your input, which saves them time.

Another benefit of selling to your siblings is that it is a way for you to receive your inheritance’s cash equivalent while keeping the home in your family.

Cons

Your siblings may not be able to pay for your share in the house. In this case, you will have to accept a promissory note, or they will have to take a home equity loan on the property. 

Potential Issues

You and your siblings have to determine a fair price for the house. Because none of you paid for the property, it may be necessary to use several valuations.