This article highlights five pivotal roles a professional appraisal plays in property decisions and legal and financial considerations when dealing with an inherited house.
Read on to better understand these aspects and see why ordering an appraisal is an indispensable step.
#1 Determining the Fair Market Value for Tax Purposes
To accurately report taxes on an inherited house, you must establish its cost basis. That necessitates a formal appraisal.
That’s because the cost basis for inherited real estate isn’t the original purchase price. Instead, it’s set to match the property’s fair market value on the date of the previous owner’s death.
This stepped-up basis is the number you’ll use in calculating capital gains — profit made when selling. So, it directly affects how much you owe in taxes.
As the basis is increased to the fair market value, it effectively reduces your potential capital gain. That leads to lower taxes.
By establishing that accurate date-of-death value, an appraisal ensures that you have the correct basis.
Understating or overstating it would otherwise lead to a higher-than-necessary tax bill or penalties for underreporting.
Furthermore, estate tax calculations at the federal and state levels depend on the accurate valuation of a deceased person’s assets, real estate included.
So, an appraisal is also crucial for staying in compliance with these regulations, which have varying thresholds and distinct tax rates.
#2 Fair Division of Assets Between Heirs
Getting a professional appraisal is essential for fair asset distribution, whether heirs sell their inherited property or keep it.
If they decide not to sell, the appraisal establishes an agreed-upon market value, which is then used to determine each heir’s fair share of the estate.
If one or more heirs want to buy out the others, an appraisal ensures an equitable and accurate calculation of a buyout amount.
Often, selling a home during probate is the most straightforward way to divide assets equitably for inheritance.
In this instance, an appraisal plays a significant role in ensuring the sale reflects the property’s actual value. Home valuation, as well as valuing house contents for probate, is typically the basis for the sales price.
That, in turn, means that heirs can expect a fair and accurate split of the proceeds once the property is sold.
Even when heirs decide against selling a deceased person’s house immediately, they still benefit from an appraisal for future fairness.
It provides a benchmark value, which is like a line in the sand. It eliminates guesswork and ensures that all heirs pay their fair share of capital gains taxes if and when the house is eventually sold.
#3 Deciding on Whether to Sell or Keep the Property
To make an informed decision about selling or keeping the house, a professional appraisal is indispensable, providing critical insights into market value and condition.
That enables you to assess potential financial returns and accurately estimate how much repairs may cost.
Additionally, an appraisal helps you determine the potential tax implications of selling.
You pay tax when you sell a house you inherited and make a profit. Since the appraised value becomes the cost basis for calculating the capital gain, you can forecast taxes.
Be aware that if you keep the house as your primary residence for a qualifying period, you may avoid capital gains tax on your inherited real estate.
Also remember, keeping the property allows for rental possibilities.
An appraisal isn’t a rental analysis, but it helps you compare selling proceeds with potential rental income. So you can more clearly decide whether it’s better to sell or rent an inherited house.
The clarity and insights gained from an appraisal are particularly helpful when considering the emotionally difficult situation of selling a parent’s home.
It tempers sentiment and helps ensure your decision is based on a sound financial analysis.
#4 Getting Mortgage or Refinancing
Inheriting a house and looking into loan possibilities underscores the need for an appraisal.
Say, for instance, you inherited your parents’ house, and it has an existing mortgage. You might consider refinancing to improve the interest rate or loan terms.
If the house is paid off, you may opt for a new mortgage to access equity to cover renovations, repairs, buyout of heirs, or another financial goal.
No matter which, most lenders require an appraisal as part of the application process. They use it to assess risk, confirm sufficient collateral, and determine how much to lend you.
It’s not just about the lenders, though. An appraisal arms you with highly useful information when receiving an inheritance of a home you’re looking to refinance.
When you know the amount of equity your property has, you can figure out how much cash you may get (when refinancing or getting a new loan).
Plus, you can also use a strong appraisal as leverage in negotiating interest rates and loan terms. You’ve got solid proof of your property’s worth.
#5 Handling Legal Disputes
A professional appraisal is an effective tool for resolving legal disputes that occur among heirs, or arise from tax authorities.
For example, when heirs disagree over the value of an inherited house or how shares of the property should be divided, an appraisal provides unbiased, reliable evidence.
This assessment can be used in court or mediation to reach an agreement. That can prevent drawn-out legal battles.
In the case of tax disputes, not having an appraisal to set the property’s adjusted cost basis at inheritance can lead to substantiation problems that may escalate into legal battles.
Without this valuation, your capital gain or loss is a guess, and your ability to accurately report the sale of inherited property on your tax return is highly questionable.
Moreover, the need for an appraisal to support your claim is even more critical if you sold the property at a loss.
That deduction will likely be disallowed without documentation, increasing the risk of legal issues. With an appraisal, you can deduct a loss on the sale of an inherited house with certainty.
What’s the Easiest Way to Sell an Inherited Property?
While you can sell through traditional real estate avenues, many find that working with a company specializing in inherited real estate purchases is the easiest approach.
This is especially true if you’ve inherited a house that needs work or, in a more daunting situation, inherited a hoarder house.
Selling the traditional way in either of those scenarios can be quite challenging. That makes a direct sale to a real estate investment company particularly appealing.
Additionally, this approach allows you to:
- Get immediate cash: One of the biggest benefits is cash in hand, eliminating the waiting period required by a typical home buyer to get a mortgage.
- Close quickly: Time to closing is typically days versus a month-plus, which is ideal when you need to sell an inherited property fast.
- Avoid red tape: Experience a streamlined process with less paperwork that would be required by a typical buyer’s lender.
- Skip pre-sale preparation: These buyers routinely work with heirs selling an inherited house as is, so you avoid repairs and cleanup.
- Pay no commission: Keep more of the home’s equity by avoiding a real estate agent commission.
- Save on closing costs: You don’t have to worry about these expenses. Professional cash buyers typically pay them.
To help you find the right buyer, we’ve vetted and approved a list of investment companies specializing in this area. Get a cash offer from several firms and do a compare and contrast.
To explore more ways to sell and better understand the nuances of each, dive into our article on selling an inherited house.
