How Selling a Probate House Affects Your Taxes in TN?

If you have recently lost a loved one, you may hear the phrase “probate” come up. You find yourself wondering, “What is probate?” When someone passes away, the estate must be transferred to the deceased person’s heirs. Probate is the process of determining how to transfer the estate, along with paying any creditors that may be owed. Real property is usually the biggest asset tied up in probate and can take months before the heirs have rights to officially claim it. How does probate affect taxes?

Hopefully, New Leaf House Buyers’ guide to probate will help you solve your probate sale-related questions.

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1. The Will has to be submitted to the county probate court where the decedent lived.
2. A Petition of Probate will be submitted as well. It requests permission to appoint an executor of the estate. This person is the Personal Representative who will ensure this process is completed correctly. The court appoints the Personal Representative when there is no Will to name one. The court requires that all heirs are notified that probate has begun for the estate.
3. Letters Testamentary are given to the Personal Representative by the court which grants them the legal authority to act on behalf of the estate.
4. The probate is published by local newspapers to alert any creditors. They have 4 months from the first publication to make a claim against the estate.
5. The estate’s assets must be inventoried and listed by the court within 60 days.
6. The debts of the estate, including any money owed to creditors must be paid. If assets must be sold to pay the debts, the Personal Representative must get approval from the Court for the probate sale.
7. The Petition to Close the probate is filed when all taxes and creditors are paid. The Personal Representative must file a “Request For Relief” with Tenncare to ensure they will not be seeking medical cost reimbursement.
8. An Order is issued by the Court distributing the estate’s assets to the heirs.
9. A fee may be paid to the Personal Representative based on the difficulty of the process but these are often waived.

What Is a Probate Sale?

After step 6 above, the personal representative will need to hire a real estate agent if they want to sell the property. The agent inspects, appraises, and renovates the house if necessary. Once it is sold the personal representative will divide the proceeds between the aires once all debts have been paid.

Questions in the process are: Will there be capital gains taxes, Can we get a home sale tax exclusion, What are stepped-up basis rules, and more.

What Is the Best Way to Sell a Probate House?

Without a will or trust, it is almost impossible to sell the home of a deceased relative without going through the probate process. You cannot sell what you don’t legally own, so probate is required to get the house in your name.

Selling a house can help pay off debts and fees associated with the property. Professional cash buyers like New Leaf House Buyers are the fastest at buying houses in probate. If it can’t qualify for traditional financing due to the repairs needed, a cash buyer can close fast on houses in probate.

Can I Apply the “Home Sale Tax Exclusion” to My Probate Property?

You can save big time on taxes using the home sale tax exclusion when selling a home. Single sellers can file for up to $250,000 capital gains tax exclusion, while married couples filing jointly can file for $500,000!

The big question is do these rules apply to probate house? It depends. If you lived in the house for two of the last five years and paid taxes on it, you may qualify for the exclusion.

You could also move into the home, start paying the taxes and then sell it in two years. If that doesn’t work, you can apply the stepped-up basis rules.

“Tax Basis” is fancy tax lingo for a benchmark value assigned to a house. This baseline value is compared to the sale price to determine the gains or losses when a property is sold.

Once the homeowner is deceased, the inheritor receives a stepped-up tax basis. The home is appraised at current fair market value instead of when the deceased owner purchased the house. Most inheritors receive substantial tax savings with a stepped-up basis.

If beneficiaries receive the stepped-up basis, they will not be qualified for the $500,000 in capital gains tax exemption. Usually the tax exemption won’t matter if the home sells for the fair market value. Let’s say an inheritor sells the property for exactly the current fair market value of $450,000. It won’t matter if the deceased homeowner’s purchase price was $100,000, the inheritors stepped-up tax basis ($450,000) matched the fair market value ($450,000), so there will be no taxes on any profit.

What if the house sells below the fair market value? You get to claim a capital loss, which reduces the amount you have to pay in taxes. Here are the rules: The property sale must be an arm’s length transition, The property is sold to someone unrelated to the decedent’s family. The property won’t be used by the decedent’s family for personal purposes. Leading up to the sale, the property isn’t a converted into a structure for some other kind of use.