While inheriting property in Texas can be advantageous, managing it is a huge responsibility.
Being a legal process, it involves a lot of paperwork, tax implications, and risks. Plus, inherited properties also have to go through the Texas probate process. And if you intend to sell the inherited Texas property, several other challenges need to be overcome.
At Priority Home Buyers, our aim is to simplify the process of selling your inherited property. For this purpose, we’ve put together this guide on the topic that explains everything you need to know about selling an inherited house in Texas.
This guide covers all aspects of the selling process, including the probate process and taxation, that need to be taken into consideration. It will help you understand what is the best way of selling an inherited house with minimal hassle and maximum returns.
Is It Possible To Sell Inherited Property Texas?
While you can sell an inherited property in a somewhat similar manner to selling your own house, there are certain things to keep in mind. The most important among these is that it is only possible to sell the inherited property after the probate process is complete.
During this period, you are responsible for maintaining the house, paying various taxes and utility bills, etc. Any liens will have to be removed, and any repairs required will also need to be done.
Additionally, in some cases, the ownership may be shared between multiple people, making the situation more complicated. In such instances, all the owners must reach an agreement regarding the sale of the property.
The Probate Process in Texas
Probate is a legal term that refers to the process of paying off creditors of an estate using its assets. After a property owner’s death, all their assets become part of their estate. And only after the creditors are paid off and other expenses, such as property taxes and other legal obligations, are completed can it be passed onto the heirs.
The probate process can take as little as four months or as much as two years, depending on the property. It can also differ between various states, though in most instances, the process involves the appointment of a personal representative or executor for the estate.
That being said, it can happen that the person inheriting the Texas property may also be the executor of the estate, which can make things a bit simpler. The executor or the beneficiaries mentioned in the will can take the help of a Texas probate attorney who can expedite the process.
Selling A House During Probate Process Texas
As mentioned above, all the debts of the previous property owner will have to be paid off before the property can be passed onto the heir or heirs. Sometimes, the available funds may not be enough for the purpose, and the personal representative of the estate may need to sell off the property to pay the debts.
If the house needs to be sold off for this purpose, its ownership will not pass to the heirs. Also, taxes and other outstanding payments will be managed on the income tax returns of the estate. However, mortgages are an exception that do not need to be paid off during the probate process.
Situations Where Probate Is Not Needed Texas
There are certain situations where a probate is not required, which include:
1. More Than A Single Owner Is Mentioned In The Deed
The property deed may mention more than one owner and state tenancy by the entirety or joint tenancy with the right of survivorship. This allows the house to be automatically transferred to the remaining owner without going through probate.
2. Transfer On Death Deeds
A transfer on death deed also allows the house to be transferred without going through probate and can speed up the property transfer. However, only some states allow transferring property using such deeds.
3. Inheriting Property In A Trust
Property placed in a trust does not require probate to be transferred to the heir. This means that even if only a part of the estate is with the trust, it will be transferred according to the instructions of the trust. The rest of the estate may have to go through the probate.
Selling Property Inherited Jointly in Texas
If you’ve inherited the property with other family members, such as siblings, all the owners are jointly responsible for managing it. It is important to understand that if there is any conflict regarding the property, other joint owners can force its sale.
This usually happens when most of the heirs want the property to be sold off or if available funds are insufficient and more money is needed to repay the debts. In such situations, the house can be sold during the probate process. To do so, the heirs interested in selling the property must visit the probate court and file a partition action.
If the approval of the court is obtained for selling the house, it can be appraised and listed for sale. Once it is sold, the proceeds are divided between the heirs, including those who opposed the sale.
Can You Sell Inherited Texas Property To Family Members?
Selling an inherited property to a family member is possible and can be quite beneficial. You do not need to go through the hassle of listing the property and searching for the right buyer. On the flip side, determining the selling price of the house may be challenging when a family member is concerned.
In such circumstances, a real estate agent can help make an arrangement acceptable to all parties.
Taxes On Inherited Property Texas
In certain cases, you may need to pay taxes when inheriting and selling inherited property, so knowing what taxes need to be paid can be quite helpful.
Taxes When Property Is Inherited
1. Inheritance Tax
Inheritance tax is a state tax applicable in certain states and depends on the value of the property inherited. The states where this tax is applicable include:
- New Jersey
However, the rates can vary between the states. Additionally, certain family members, such as a surviving spouse, are exempt from this tax, while others may need to pay at a reduced rate.
2. Estate Tax
The federal estate tax is paid not by the heirs but by the deceased’s estate. And only the wealthiest estates need to pay this tax, which means it depends on the fair market value (FMV) of the house. Currently, for the year 2023, estates that are worth $12,920,000 are required to pay estate tax.
But sometimes, certain estate taxes or other payments may be owed that cannot be paid off without selling some of the property of the estate. So, it cannot be inherited by the heirs.
3. Gift Tax
If you inherit property from someone before their death, a gift tax is applicable instead of an inheritance tax. The person transferring the property must report the fact to the Internal Revenue Service (IRS) or pay the tax. In reality, however, few people need to pay gift tax.
Those inheriting property as a gift need not report it to the IRS, but it can affect capital gains tax.
Taxes When Inherited Property Is Sold Texas
1. Capital Gains Tax
Any gains made by selling an inherited property are subject to capital gains tax, but you may not need to pay this tax in all situations. Whether the capital gains tax needs to be paid will depend on the FMV of the house. The IRS utilizes a stepped-up methodology to determine how much the property value has appreciated, which will affect the tax amount.
Additionally, capital gains taxes on the sale of a Texas house will be affected by the length of time you owned the property. If the inherited house is sold within a year of inheriting it, short-term capital gains tax is applicable. On the other hand, long-term capital gains tax will be applicable if the property is sold after a year.
2. Income Tax
You may also need to pay income taxes on the inherited property in certain instances. For instance, if the inherited property was rented out before being sold, you will need to pay income tax on the rental income earned during that period.
Stepped-Up Basis Texas
A stepped-up basis means that the tax on the sale of inherited property depends on the market value at the time of the original owner’s death. It is not calculated from the date of the purchase of the property.
So, if the inherited house was valued at $300,000 when the previous owner died, that is the value on which the tax will be calculated. It remains true even if the property was originally purchased for a different price.
This can be advantageous when selling your inherited home, as capital gains tax only applies to the difference between the determined value and the sale price. If it applied to the difference between the original price of the property and the price at which you sell it, the tax would be much higher.
Dealing With Mortgages When Selling Inherited Property Texas
The process of selling an inherited property is also affected by whether it has a mortgage. In situations where the mortgage was taken by the original owner alone, the estate will have to continue repaying the monthly mortgage payments until they are fully repaid. Doing so will be the responsibility of the executor of the estate.
Unlike other payments, however, mortgages will not stop you from assuming property ownership. But you will become responsible for the mortgage payments after becoming the new owner. In such instances, it is best to consult the lender to understand how to manage the mortgage.
There are also cases where the will may specify that the property should be transferred ‘free and clear.’ In such circumstances, the executor shall have to use the funds from the decedent’s estate to make the monthly payments in full before transferring the property to you.
On the other hand, the process is simpler if there is no mortgage on the inherited property. You just need to contact the local property records office to put the home deed into your name, making its sale easier.
Understanding What Is The Fair Market Value (FMV) Of An Inherited Property Texas
The fair market value (FMV) of a property is the value that it would be sold in the open market. For an inherited property, the value of the house on the date when the previous owner died is its FMV. As already explained, the FMV is the basis on which the tax is calculated, and you need to pay capital gains taxes if the house sells for a higher price.
For instance, the tax basis for the inherited property may be $400,000, and it may be sold for $500,000. In such cases, the capital gains tax will be applicable only on the additional $100,000.
Can You Avoid Capital Gains Tax When Selling Inherited Property Texas?
If you’re planning to sell an inherited house and wish to avoid capital gains tax, the most effective way is to make it your primary residence. The property should be used in this manner for two years so you can take advantage of the home sale tax exclusion.
That said, this solution may not be suitable for everyone. Another option would be to sell your inherited home at a loss. While most people may not want to do so, sometimes you may need to sell off the property quickly without looking for the best price.
For a real estate investor, it may be possible to offset various gains using the loss on the property sale in their investment portfolio. To determine the best course of action, it is recommended to consult a financial advisor when selling an inherited house in Texas.
Taking Advantage Of The Home Sale Exclusion
As explained above, qualifying for the home sale tax exclusion can make certain gains exempt from capital gains tax when selling an inherited house in Texas, or anywhere else in the country. Formally known as the Section 121 Exclusion, this can be most useful for married couples or the head of a household.
Under this exclusion, the first $500,000 gained on the sale of an inherited home will not be taxed if the taxes are filed by a married couple. Similarly, the first $250,000 will be exempted when the head of a household or a single person files taxes.
Ways Of Selling An Inherited Property Texas
1. Through a Real Estate Agent
Selling inherited property by taking the help of a real estate agent is among the most common ways since it reduces the effort required on your part. Such agents can help set the right price and handle the negotiations. They can also make the property more attractive than competing ones and help get the best returns.
2. Through a Real Estate Investor
Real estate investors are individuals or Texas companies that buy homes, and can help you sell your TX property for cash quickly. Selling to such investors means there is no need to take care of repairs and similar aspects, and the paperwork involved is minimal.
3. Selling As an Owner
You may want to sell the house without the help of a real estate agent or investor, but this will require more effort and time. However, the advantage of this method is that you do not need to pay commissions to such agents.
4. Through an iBuyer
iBuyers are usually found in larger cities and charge fees for assisting in the sale of a property. In such cases, the transaction is usually conducted online, and the payment is quick, but the repair costs involved have to be deducted from the total price.
Selling Inherited Houses Texas
1. Prepare The Inherited House For Sale
To make inherited homes ready for sale, you must remove all personal belongings and effects, declutter the rooms, and clean out the house properly. There are various ways by which this can be done, such as holding an estate sale or yard sale.
You can take the help of an estate sale specialist who can make it easier to determine which belongings to keep and which to get rid of. Once the house is completely clean, repairs can be made to make the selling process easier.
2. Hiring a Real Estate Agent
Hiring a clever real estate agent can make selling your inherited property considerably easier. Such estate agents are familiar with the various laws and regulations relating to the sale of inherited property and can guide you through the process.
Make sure to prepare a list of questions beforehand to ask the real estate agent when hiring one. This will help you find an agent with the required expertise who can take care of your interests more efficiently.
3. Pricing Your Home Correctly
Pricing your inherited property correctly is an extremely crucial aspect of the selling process and is another area where the services of a real estate agent can be invaluable. The price will depend on various factors, such as whether the property has a mortgage or other debts and the current market trends.
Keep in mind that it is highly unlikely that the property will be sold for the asking price. Avoid listing the property for an unreasonably high price, but make sure the price is higher than what you’re ready to accept. A real estate agent with good negotiating skills can help you get a reasonable price.
An alternate strategy is to list your home at a price lower than similar properties, which can attract several buyers. The buyers can then bid for the property, and you may get a better price than expected.
4. Creating A Portfolio
Research indicates that houses photographed professionally sell faster, so it is a good idea to create a portfolio by hiring a professional photographer. Such a photographer can capture the property so that showcasing it to interested buyers and capturing their attention is easier.
Make sure to showcase all the rooms and facilities in the portfolio so potential buyers can get a good idea. Also, be prepared to answer questions relating to these, as buyers may want to know about various aspects in detail.
5. Handling Showings
If you have hired a real estate agent, they are responsible for scheduling house showings and holding open houses. They may even provide online tours through video chat for this purpose. Such activities will help generate interest in the property and allow potential buyers to learn more about it.
6. Negotiating Various Offers
Depending on the price, you may get several offers from different buyers. These offers must be compared with the listing price to determine the best one. This is also the stage where you or the estate agent will have to negotiate with the buyer to get the best price.
When doing so, keeping a few things in mind can make the process easier for you. Firstly, avoid agreeing to a price that is less than the value of the property. Additionally, sometimes buyers may offer a low selling price and seek assistance for improvements and repairs. Before you agree to any concessions, consult with your Texas real estate agent.
7. Closing The Sale
Once the buyer and seller agree on a price, it is time to finalize the sale. This generally involves dealing with legal formalities, such as paperwork and completing the payment of home-sale taxes and closing costs. Once these are complete, the legal ownership of the property will pass on to the buyer.
Selling an inherited property in Texas can be complicated, especially if the ownership is divided between multiple heirs.
That is why understanding the various ins and outs of the process properly is crucial. Different approaches can be followed depending on whether there is an agreement between the various owners regarding the sale of the inherited house. Additionally, you may need to wait sometime before selling the property to reduce or avoid certain taxes.
It is highly recommended to consult a realtor or experienced real estate investor to make things easier. They can guide you through the various stages of the selling process and help avoid mistakes that may prevent you from getting the best price.
We at Priority Home Buyers are here to help, and we are available 24/7 by phone at 877-775-0988.
With proper time and effort, it is possible to overcome the various obstacles in selling an inherited house and getting the best price.