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Selling Inherited Property Colorado
The death of a loved one can be overwhelming and devastating. Even more so if it's an immediate family member such as a parent or a spouse. And so, it is understandable that settling the affairs of the deceased is the last thing on your mind.
If there is no estate plan in place, all of their assets may have to go through probate. If this is the case, sorting through all the Colorado legal ramifications of an inheritance is a whole other headache on its own, so you may want to enlist the services of a probate attorney.
Your loved one can leave you various things as inheritance. These can include a retirement account, bank accounts, stocks and bonds, a collection of luxury items such as art, vintage cars, and watches, or other personal property such as jewelry and clothing. For the purpose of this guide, we'll focus on inherited real estate Colorado.
When you get an inherited house, you inherit not just the asset but a host of responsibilities as well: monthly mortgage payments, property taxes, and maintenance, among others. If you choose to sell your Colorado inherited home, it could mean a large financial windfall and, on the other side of the coin, a large tax bill as well.
In this article, we'll walk you through the process so you can avoid a hefty tax bill and make the most out of selling inherited property.
The Probate Process for Inherited Properties Colorado
Unless your deceased relative had an Coloradoestate plan in place, all of their assets must undergo probate. Probate is a court-administered, legal process that involves the review, collection, and distribution of a person's real estate and other assets after death.
The probate process ensures that a person's will is valid and that all their outstanding debts and taxes are paid off before their property is given away to their intended heirs. If there isn't enough liquidity to cover debts, the Colorado probate court may order an estate sale to liquidate some of the assets and pay off creditors.
Depending on the complexities of the estate, or whether there are conflicts that need to be resolved, probate can take anywhere between six to nine months. It involves a lot of people such as probate attorneys, so the cost could run between 3-7% of an estate's value.
Taxes When You Inherit Real Estate Property Colorado
Generally, once probate is completed and the probate court grants you legal ownership of the Colorado inherited property, you don't have to pay any taxes. There are some exemptions, however:
If you live in one of these six states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania, this is one tax you have to deal with the moment you inherit property. How much you have to pay depends on the inherited value of the property and your relationship with the decedent, with spouses typically exempt.
As inheritance taxes vary from state to state, check with a local tax professional who can help you with the specifics.
While there is no federal inheritance tax, there is a federal estate tax. Thanks to the estate tax exemption, this is only applicable to assets beyond $12.06 million in 2022. This is a substantial tax shield, but this exclusion to estate taxes will revert back to $5.49 million by 2025.
Heirs typically don't have to pay estate tax as this is taken directly from the assets of the deceased before distribution to the heirs after the Colorado probate process has been completed.
Once you inherit property, you now have to pay taxes annually on said property. The taxes collected are used to fund local government projects such as roads, schools, and other public services.
The amount you have to pay depends on your Colorado property value as assessed by the local municipality or city where you inherited the property.
So You Inherited Property. Now What Colorado?
Now that you're the brand new owner of a valuable property, you may be wondering what you can do with it. Such a nice thing to wonder about, right?
Well, there are three avenues open to you regarding your Colorado inherited home:
According to the New York Times, nearly three-quarters of Americans dream of having their own home--even placing it above having a successful career or raising a family. Thus, you can certainly consider keeping and living in your inherited house. Doing so can give you time to save up and probably upgrade the Colorado home so you can sell for more money in the future.
If you have a house already, renting out inherited property can be a good source of passive income; or, if your inherited property has a mortgage, the rent collected can be used to pay it off, and you end up with a fully-paid property later on.
However, there are a few financial aspects of owning a Colorado rental that you must be aware of:
- An inherited house can either be well-maintained or in dire need of maintenance. In the latter case, you will need to spend upfront for the repairs and renovations to bring it up to code or make it livable, and thus, rentable. In any case, this will have to come out of your pocket
- Rental income will be part of your taxable income, therefore, depending on your bracket you may pay income taxes up to 37% on it
- You may have to get landlord's insurance in order to protect yourself against property damage
Selling inherited property is no different than selling a property you have acquired yourself. There are the usual things to take care of prior to a Colorado home sale, such as: removing liens, cleaning out personal property, repairs and renovations, and understanding the tax implications when you sell property. More on this below.
Tax Implications of Selling an Inherited House Colorado
Fair Market Value and Tax Basis of an Inherited Property
The fair market value (FMV) is defined as the value of the house if you were to sell it on the open market. In other words, this is the price that both buyer and seller would agree on without any pressure in the trade.
On the other hand, the tax basis is how much a property cost you. In case of inherited property, the tax basis is equivalent to its FMV during the time of its original owner's death, and not how much the previous owner bought it for. This is called a "step-up in basis".
For example, the original owner got the house for $100,000 ten years ago, and it is worth $250,000 at the time of their death. Your Colorado tax basis will then be $250,000 after the ownership is transferred to you.
However, let's consider a hypothetical scenario: you were given a house as a gift, and then a few weeks later, the original owner dies. What happens to your tax basis?
In this case, as long as the title is transferred to you before their death, you inherit your benefactor's tax basis, or how much it cost them to purchase the property. In the example above, your tax basis will then be $100,000.
Depending your basis, this can have a significant impact on the capital gains taxes that you'll need to pay.
Capital Gains Tax
In the eyes of the Internal Revenue Service (IRS), as long as you sell an asset for more than its basis, it will be considered capital gain, and you have to pay taxes. The rate depends on how long you held the property prior to the Colorado home sale. The taxable gain is calculated from the difference between the final sale price and the inherited value.
Short term capital gains
Selling an inherited property within one year of receiving it would be subject to short term capital gains. This means the rate that will be applied will depend on your income tax bracket. Therefore, you have to pay capital gains taxes of up to 37% on the money you make from the sale.
Long term capital gains
If you wait a bit and sell after more than a year, the long term capital gains tax rate will be applied (between 0%-20%). Therefore, it is possible not to pay any Colorado capital gains tax on the profits you get from the real estate transaction.
How to Minimize the Tax Hit When Selling an Inherited Property Colorado
As you can see above, the capital gains tax can gobble up a significant amount of the proceeds from your home sale process. Therefore, it's natural to ask if there's a way to avoid paying taxes.
The good news is, yes, you could totally avoid Colorado capital gains tax when you sell inherited property! According to the home sale tax exclusion found in Section 121 of the tax code, you can avoid capital gains taxes on the first $250,000 of the profits when filing as a single person; and up to $500,000 if you are married and filing your tax return jointly with your spouse.
You'll activate the tax shield as long as you meet the following requirements:
To be able to claim the tax break, the property you are selling must be considered your primary residence. This means you must live in it for at least two years in the last five years of owning it. You can rent it out in between, as the two-year requirement doesn't have to be continuous.
Before selling Colorado inherited property, you must own it for at least two years. In case of a married couple filing joint tax returns, only one of you needs to fulfill this requirement.
As long as you haven't claimed the homeowner exclusion in the last two years, you're eligible to claim this exclusion.
What if You Don't Meet the Residency Requirement?
The primary residence requirement for the Colorado tax break is probably the most difficult to meet since two years is quite a long time to wait before selling.
What if you want to cash out now?
Fortunately, if you're in the military, peace corps, or police corps when you inherit the property, you can qualify for the maximum exclusion of capital gain.
Still, if you don't meet the above requirements, there's still a way wherein you can legally avoid capital gains tax albeit partially. The IRS allows a partial exclusion of gain despite owning and living in your inherited property for less than a year.
For example, if you have lived in your Colorado inherited home for six months prior to the sale, you can claim a 25% tax shield on your capital gains. Since you are selling before one year is up, short term capital gains tax rates (depending on your income tax bracket) will apply.
If you lived there longer, say, for more than a year, a higher tax shield percentage subject to long term capital gains tax rates will apply.
Ways to Sell Inherited Property Colorado
If you want to sell an inherited property, you have to decide between two things: sell for the highest possible final sale price, or sell really fast. We'll show you the pros and cons of each option so you'll make as much of an informed decision as possible.
"I Want to Sell for the Highest Possible Price."
You can sell an inherited property for top dollar as long as you're willing to invest your time, energy, and most of all, your hard-earned cash into repairs and renovations.
There are renovations that would add the most value to your property, such as upgrading the garage door or replacing your sidings to stone veneers. Alternatively, you can work with a Colorado real estate agent who may be able to advise you on those matters.
However, spending cash upfront in renovations in hopes of raising the fair market value of your home is not a guarantee that you'll be able to recoup your initial investment.
Additionally, as long as the property is in your possession, you'll be required to make the monthly mortgage payments and the costs of ownership such as property taxes and homeowner's association fees.
And then there's all the costs associated with a home sale: staging, showing, and closing costs, and of course, the commissions that must be paid to your real estate agent. Pile on the Colorado capital gains taxes, then you'll find that it could eat up a substantial amount of your profits.
If you think those drawbacks are too much, then you might just think...
"I Want to Sell Fast."
Making upgrades and dealing with endless open houses and negotiations take physical, mental, and emotional energy, and it's totally understandable if you want to do away with that. Furthermore, selling your inherited house quickly is an attractive option especially if you live out of state and can't be bothered with the upkeep.
If you sell an inherited property to a cash buyer, you can sell your Colorado home as is. This means you don't have to arrange inspections or do any repairs--even cosmetic ones! A cash buyer will purchase your home in any condition, so it won't be a problem even if the house has languished in disrepair during the probate process.
One thing to keep in mind when selling to cash buyers is that they will need to be compensated for the repairs or upgrades they may have to do so that the purchase of the inherited property will be profitable for them. Therefore, you must be prepared to sell the property for below fair market value.
Nevertheless, this is still a win for you!
Familiar with the saying "Time is Gold"? Then, this is good news!
Cash buyers, such as house flippers and real estate investors, can close really fast--sometimes in as little as seven days--since they don't have to wait for loan approval. They have cash at the ready for investments like these.
If you want certainty in your Colorado home sale process, then selling fast to a cash buyer is the way to go.
Frequently Asked Questions: Selling Inherited Property Colorado
Can You Sell an Inherited Home With More Than One Heir?
Yes. If you inherit the property with other family members, it can complicate the selling process, but it won't stop the inherited home from being sold.
The best case scenario in a split ownership is that you and your family members agree on what to do with the property. The heirs usually have to assign a point person who will be in charge of working with a real estate agent, arranging inspections, conducting open houses and so on. The proceeds from the sale, net of taxes and other expenses, will then be divided depending on your agreement with each other.
If the heirs cannot come to an amicable agreement regarding selling an inherited house, the sale can be forced through partition action.
The inherited property will be auctioned off by the Colorado court, similar to a foreclosure auction. Any profit from the sale minus all the auction, court, and attorney's fees will be divided among the heirs. This is a lose-lose situation since the heirs will get less money from the sale.
Can Mortgage Debt Be Inherited?
Yes. If the original owner dies before the mortgage is paid off, the intended heir will be responsible for the mortgage payments. If you are the heir and you don't want to deal with the hassle of monthly payments, you can either rent the property out which will hopefully cover the mortgage, or just sell it outright.
You must take note though, if there is a due-on-sale clause on the mortgage, you would need to pay off the remaining balance as soon as you gain ownership of the Colorado inherited property.
Can You Avoid Capital Gains Taxes When Selling Inherited Property?
Yes. You can claim a capital gains tax break as long as you have owned and lived in your inherited property for at least two years, and haven't claimed this break in the past two years.
What Are the Reasons for Waiting Before Selling an Inherited Property?
Waiting for Colorado local market conditions to improve
Depending on the timing of your inheritance, it can be worthwhile to hold on to your property to wait for a seller's market before listing your property.
In a seller's market, the housing demand far outstrips supply, causing your property value to skyrocket, allowing you to list your home at a higher price. There are cases where you can spark a bidding war on your property.
More time to do the repairs and renovation
If you don't sell immediately, you can consider making improvements to increase fair market value in Colorado . The extra time holding on to the property can also help you save up for those upgrades and improvements.
Take advantage of tax breaks
In this case, waiting two years before you sell really does pay off as you will be able to protect up to $500,000 in your profits from being taxed.
What Are the Reasons for Selling Your Inherited Home Now?
Save money on maintenance, repairs, and other recurring costs
If the Colorado inherited house is in advanced state of disrepair due to deferred maintenance, it might be easier for you to just sell it as is rather than throwing good money and investing your time and energy chasing after repairs. You can simply let the buyer worry about them and you walk away with cash from the sale.
Immediately get cash for your inherited home
Selling immediately upon receiving your inherited property allows you to cash in on the home equity line that your benefactor had left you. You can weigh it against the Colorado capital gains tax that you have to pay (doesn't matter if it's short term or long term), and you may find that you still come out on top.
Closing Thoughts: Selling Inherited Property Colorado
If the original owner didn't have an estate plan, the property may have spent precious time in probate before being handed over to you, so it's totally understandable that you may want to sell inherited property quickly in Colorado.
In selling inherited property, getting the most money and selling fast doesn't have to be mutually exclusive!
We know your time is valuable, so here at House Buyer Network, we provide solutions no matter your real estate situation. Are you worried that you don't live close to any major city? No worries! We have a network of cash buyers familiar with the local real estate market across the United States and in Canada!
Once you fill out our form, we can have a cash offer ready for you in 24 hours! We close on the date you choose, and as an added bonus, we cover all closing costs for you! If you have any questions, call us at (855) 835-2544 today and we'd love to walk you through our process.