Hey there! Mike from Mike Buys Houses, and I want to discuss the situation of inheriting a house that is paid off. Believe it or not, but a LOT comes with getting a property, even if it has already been bought outright, simply to avoid issues with massive capital gains tax and how to maximize your asset.
What is the Probate Process?
If the estate planning for the house was done in a way that does not allow the house to automatically transfer title, then the property will likely need to go through the probate process. However, if the assets are jointly owned or if the asset is held in a living trust, then you may be able to avoid probate.
If you are in the common situation where the assets are not jointly owned and the house is not held in a living trust, then you should prioritize reaching out to an attorney in your area that specializes in the probate process. Each local municipality has their own rules and requirements, so it’s really important to find someone who is familiar with your location.
If the estate has other debts, the property could be required to be sold in order to pay off those debts.
Unsure if your property would be eligible for probate? Reach out to a local attorney or give us a call and we can help walk you through the process!
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Is there a deadline for the probate process?
Yes, there can be deadlines applied to the process, depending on your location, so make sure to act on this quickly. Even if you’re unsure what you need to do, reach out to someone ASAP to find out what action is needed and by when, because some states give you as little as 10 days to get the process started. If you are inheriting a house that is paid off then these are the steps you may take in the probate process:
The Probate Process
Probate Step 1: File a Petition
This step is generally considered first as it is when you alert the local court of the death and you will likely need to file some paperwork such as providing the death certificate.
Probate Step 2: Hearing on Petition
This phase is when a decision is made on your property and petition.
Probate Step 3: Letters of Administration are sent out
This is where the local court makes someone the manager of the estate, likely you in this situation if you’re the one who filed the paperwork. Once you’re the manager of the estate, you will want to see if you’re required to get a probate bond to protect against any claims. This bond would protect you, the manager of the estate, in case there are any errors down the line and someone tries to begin litigation in order to get past debts. This bond protects you from being liable for those claims.
Probate Step 4: Notice to Creditors
This is a notification to all creditors to make any claims against the estate and the inventory of the estate. This will require you to provide proof of ownership for all the assets in the estate. You can then begin the process of tallying up what the finances of the estate really look like.
This is when you will find out if you need to sell the house to cover the debts or not.
Probate Step 5: Estate Taxes
Even if you’re keeping the property, you will still have some financial hurdles to clear, such as paying off all the estate taxes that apply. These taxes would be paid by filing personal business tax returns for the estate to determine the tax burden.
It is advisable to consult with a CPA for this portion, as estate tax law can be confusing and tedious.
Probate Step 6: Final Distribution
There will be a final petition for distribution which will allow any creditors who are debtors to make their final claims. At that point, ownership can finally be transferred and you can decide on what you want to do with the property.
What to do with an inherited property without a mortgage?
I’ve touched on this in other videos and articles, but basically, you can do whatever you like! If you are inheriting a house that is paid off then you can determine the best course of action for you. You can of course sell the property as a For Sale By Owner (FSBO), where you find buyers, show the house, and close the transaction. This will save you on commissions but is a very difficult process that could extend the time to sell.
Of course, you can sell the property with a realtor, where you will need to pay a high commission, but you also get the luxury of someone else marketing the property to a much larger buyer pool.
Better yet, if you are inheriting a house that is paid off then Sell to me at Mike Buys Houses! You can get an offer from us for your property, for either cash or terms! We make the deal customized for your specific situation, and we can close within a week. No commissions, no worries.
Some things to keep in mind when deciding how to handle selling the property or not would be what kind of repairs the house needs, as well as if you are capable of making the repairs yourself and paying for the parts and materials.
How to avoid paying capital gains tax on inherited property?
Capital gains tax is based on the difference in the sales price versus the fair market value of the property on the day that you inherited it. Basically, you pay tax on how much the house’s value has appreciated since the day of inheritance.
Therefore, if there’s been no appreciation from inheritance to sale, then you may be able to avoid a huge capital gains tax. In that same line of thinking, the faster you sell the property, the less chance of appreciation, and the lower the possible tax implications become.
You can also move into the property upon inheritance if they have a mortgage still by reaching out to the lender on the property and finding out how you can achieve this. You can typically keep the same terms and continue making payments on the property.
Finally, you can also rent the property out and become the bank. You start receiving regular monthly payments from your tenants and add some revenue to your personal budget. Just know that this can be a lot of work, so make sure you have the time available to manage a property.
If you don’t know about being a landlord but this sounds like the best option for you, give me a call and we can manage the property while you still receive the monthly payments. We can make sure you get a fantastic deal.
Whatever your situation, I’m positive we can help. Give me a call or fill out the form below.
I look forward to helping you!