As our parents age, we have their estates to consider. If you want to skip the probate process for their house, it might be worth considering selling your parent’s house before death instead of after.
Allowing the house to go through the probate process after death can take 6-12 months depending on how complicated the estate is, how well the will is laid out, and how busy the probate courts are.
To make things easier (and cheaper – no probate fees), it could be worth considering selling your parents house before death.
This article will tell you what your options are and things to look out for when selling your parent’s house.
Tax Considerations When Selling Your Parent’s House
You and your siblings (if you have any) most likely want to go the route that allows you to pay the least amount in taxes when selling your parent’s house.
There are two routes; one that you have to pay taxes with and one that is tax-free.
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Taxes When Selling Parent’s House Before Death
If you sell your parent’s house BEFORE death, then you can avoid paying taxes.
(Note: consult an accountant and your estate attorney for advice.)
But, your parents can sell the house and not pay capital gains. Then, they can gift the money to you tax-free. With this route, no one pays any taxes on the sale of the home and passing that money down to heirs as an inheritance.
When your parent’s sell their house, they won’t have to pay any capital gains taxes, assuming they meet a few criteria.
Your $250,000 or $500,000 exclusion typically goes out the window, which means you pay tax on the whole gain, if any of these factors are true:
- The house wasn’t their principal residence (meaning this house was their vacation home).
- They owned the property for less than two years in the five-year period before they sold it.
- They didn’t live in the house for at least two years in the five-year period before you sold it. (People who are disabled, and people in the military, Foreign Service or intelligence community can get a break on this part, though; see IRS Publication 523 for details.)
If your parents meet these criteria, then the IRS will allow them to NOT pay taxes on capital gains up to:
- $250,000 of capital gains on real estate if they are single.
- $500,000 of capital gains on real estate if they are married and filing jointly.
For example, if your parents bought a home 20 years ago for $200,000 and sold it today for $800,000, they would make $600,000. If they are married and filing jointly, $500,000 of that gain might not be subject to the capital gains tax (but $100,000 of the gain could be).
If one parent has passed away, and the surviving parent plans on selling the house, then the surviving spouse has up to two years from the date of the other spouse’s death to sell the house and still shield up to $500,000 in capital gains.
Now that your parents have sold the house, it’s time to start gifting that money to the heirs. The IRS allows someone to gift up to $15,000 to an individual each year.
Now, you may be thinking, “I don’t have time to get $15,000 per year.” I get it, but there are ways around this.
If you have siblings, this gets really easy. Let’s assume you are married and you have a sibling who is married.
The $15,000 limit is PER PERSON. This means that your parents can gift $15,000 to you, your spouse, your sibling, and their spouse EACH YEAR.
So, if your parents sell their house for $180,000 and they give $15,000 to all four of you each year, then they can gift the proceeds from the house to all of your in 3 years.
4 People x $15,000 = $60,000
$180,000 (Sold Price) / $60,000 Annual Gift Tax = 3 Years
There are other ways to pass money down to heirs before death tax-free. These come in the form of 529 plans, medical costs, etc. Consult your CPA and Estate Attorney to figure out how to further reduce the tax bill when selling your parent’s house before death.
Taxes When Selling Parent’s House After Death
So, you have figured out the best way to sell your parent’s house and pay the least amount of taxes. But what happens if you just wait to sell the house until after they pass away?
When they pass the house down to you, you get to take advantage of the stepped up basis. This just means that if your parents bought the house for $5,000 during the Great Depression and it’s worth $700,000 when they pass it to you, then you can think of $700,000 as “the price you bought it at.”
Yes, I know you didn’t buy it, but let’s make this easy.
When your parents pass away and you inherit the house at $700,000, it could take 6 – 12 months before you’re able to sell the house.
Numerous things affect this, like cleaning out the property, fixing the property up, renovating the property, listing the house and finding a buyer, and how long the probate process takes.
But, let’s assume that when you finally sell your parent’s house, you’re able to sell it for $850,000. Since this is now your second home, and you profited $150,000, you will have to pay capital gains taxes on these gains.
$850,000 – $700,000 = $150,000
Since you acquired the property at $700,000, you’re not going to pay taxes on that portion of the proceeds, but you’ll be paying roughly 15% on the remaining $150,000, which is profit.
$150,000 x 15% = $22,500
Inheritance Taxes When Selling Your Parent’s House
Either route you go, inheritance taxes come out to be the same. Inheritances are not taxes unless the value of the estate is worth more than $11.18M in 2020.
But, 99.8% of people do not pay inheritance taxes. So it’s likely that you don’t even have to worry about paying inheritance taxes when your parents pass away.
How to Prepare My Parent’s House to Sell Before Death
There are two routes you can take here as well. One is listing with a Realtor and the other is selling to an investor.
Preparing to List My Parent’s House
I’m thinking about my grandparent’s house when I write this. It’s nice and it’s very well kept, but it’s about 20 years outdated.
We can sell my grandparent’s house in as-is condition and get pretty decent money for it. But it’s only going to attract a small pool of buyers, which is either other old people or someone who wants to get a house a little cheaper and fix it up how they want it to look.
But, that’s a very well-maintained home. What if your parent’s house is not so well-maintained?
You might have to remove decades of junk from hoarding, replace all of the carpeting, and paint the whole house. That’s the bare minimum. If the house is really out-dated, you might have to replace the roof, the kitchen, the bathrooms, the HVAC, and the water heater too.
But it really depends on your neighborhood. If your parent’s house is located in a neighborhood where there are a lot of newly renovated homes, then if you want to sell for top dollar, you might have to put some money into their home to get it to sell quickly and for a higher price.
If there are not that many homes being renovated in the neighborhood and most of the homes are in a similar condition to your parent’s house, then you can just clean it out, freshen it up, and list the house.
Now, since you can’t see inside of everyone else’s house, this is where you’ll want to consult a local real estate agent. Finding a Realtor who works only in the local area is key to your success. They will be able to tell you what you need to do to your parent’s house to get it ready to list.
But, make sure you ask for a market analysis (CMA). And ask for a CMA for the house in as-is condition and one to show you what you could sell your parent’s house for if you fixed it up.
This way, you can tell if it’s worth even putting any money into your parent’s house, or if you’d make more money by just selling it in as-is condition with a Realtor.
At a minimum, your Realtor will ask you to clean the house out, freshen it up with new flooring and paint, and make minor repairs, even if they don’t ask you to do any renovations.
Preparing to Sell My Parent’s House to a Cash Buyer
When selling your parent’s house to a company that buys houses for cash, then you don’t have to worry about cleaning the house out, making repairs, freshening up the house, or doing renovations.
Most companies will allow you to just take the possessions that you would like to keep and walk away from the house.
This means you don’t have to wade through mounds of hoarded belongings, hire and manage contractors, spend tens of thousands of dollars you don’t have, or mess with listing the house.
Companies that buy houses in as-is condition will be buying the house to flip it or hold it as a rental. So, they will clean the house out themselves and make the repairs that complement the investment strategy that they will use.
This is because someone who flips the house will invest a lot more money into making it nice with top of the line finishes. And someone who is going to keep it as a rental will put cheaper finishes into the property.