Selling a probate property is a study in patience. It’s important to let probate run its proper course.
The goal of this court-supervised process is to pay the estate’s debts, and to make sure the deceased person’s chosen beneficiaries receive the value they’ve been promised through the will. The conveyance of a home receives special scrutiny, as it’s typically one of the largest assets a person leaves behind.
Under the court’s watch, the executor or administrator must first be officially approved. This executor must take an inventory of the estate and correctly identify — and notify — potential creditors and beneficiaries. Anyone who rejects their potential claim to the estate must sign a disclaimer of interest.
There’s a good reason for every step in the process, and for taking each step according to the probate court’s rules. Following all the legal requirements supports the integrity of the home title. So, if you are an executor or a beneficiary who expects to sell real property from an estate, here are the steps to take, and tips to help you prepare.
Selling Through the Probate Court
To follow the will or satisfy debts, real estate might need to be sold. The beneficiary could want the house to be sold during probate, and never take title. This way the estate itself conveys the house to a buyer.
Sale proceeds satisfy the estate’s debts. When creditors are duly satisfied, and the fees and taxes are paid, the remainder of the proceeds can be distributed to the beneficiaries. Below is a sample guide to the steps.
Step 1. Pick Your Team.
Locate an experienced probate attorney and real estate agent. If you are the executor or the court-appointed administrator of the estate, an experienced probate attorney can advise you, prepare the legal documents, and represent you in probate court. The attorney can also handle vital parts of the process — things like filing for life insurance payouts, having the title search completed, ensuring the underwriters receive proper documentation, and submitting final tax returns.
A great real estate agent can save the day when appraisers and inspectors need to be recruited, regulations are overwhelming, and you need someone to cut through the noise and let you know what has to be done to the house, and what doesn’t.
Pro tip: A home left to more than one person can create special challenges if the parties aren’t all on the same page about how to handle the property. If one wishes to sell and another objects, for example, the court might need to step in. Sometimes there is no possible resolution except a partition action, by which the court orders a sale.
Step 2. Petition the Probate Court to Sell the House.
Start off by getting a current value on the house. The tax assessment is usually lower than the actual value of the home. So, hire a certified appraiser recommended by your local real estate professional or probate attorney.
Then, your attorney can petition the probate court to sell the house, submitting the appraisal with the petition. Only with the court’s approval may the house go on the market.
A high value for the property is a good thing at this point, assuming the value does not push the estate over the threshold for inheritance taxes. The reason? Capital gains taxes, which we’ll discuss in the next section.
☛ See more about inheritance taxes and how the IRS views the home sale here. And note that tax rules change over time. Don’t forget to check in with your tax specialist before you sell.
Step 3. Obtain Your Agreement and Deposit From the Prospective Buyer.
Plan to collect a 10% deposit from the buyer at this time. Disclosures to buyers should note:
- That the home is in probate and the purchase agreement is contingent on court approval. (This can add a month or so to the transaction timeline.) Your real estate agent will guide you through this.
- Any known material issues that can impact the value of the house. Your attorney can offer guidance in completing disclosure forms to the extent they are necessary in a probate sale.
Pro tip: Avoid leakage in the home’s value! Get the petition to the court promptly. If disagreements arise among the surviving family or friends, notify the probate attorney so the process can be moved along. Keep up the insurance and maintenance, and find out if the insurance company will cover the home if it is not occupied during probate.
Step 4. Take Your Bid to Court.
When a real estate sale needs probate court approval, the court date is publicized, giving others a chance to bid up the sale on behalf of the estate. The current bid will be stated in court, and others may submit higher bids as instructed by the judge. Anyone planning to make a bid must be prepared to offer a cashier’s check. Check with a professional to be absolutely sure the check is properly made out to the estate, for a deposit of 10%+ of the bid.
The terms of the sale and the comparable properties’ values should be reviewed in advance. A court order is final. Once the bidding ends, if the prior prospective buyer has been outbid, that party’s deposit must be refunded.
Step 5. Close on the Sale.
Only the court-approved personal representative (executor or administrator) is authorized to sign real estate documents on behalf of the person who has passed away. The deed must be signed by the named personal representative, on behalf of the named deceased owner.
Be sure to check the legal description before recording the deed with the county. For the deed to withstand any challenges, supply a perfectly correct real estate legal description.
Step 6. Report the Transfer of Value to the Internal Revenue Service.
The distribution of real estate sale proceeds must be accounted for on IRS Form 706 and Form 8971 as instructed by the forms.
Additionally, understand the rules for reporting to the state where the home is. Here, for example, are the instructions for reporting property transactions in Pennsylvania.
☛ Note: A homeowner can transfer a deed through a will without a lawyer. Passing a home on through your will means your heirs get a break on capital gains tax. If you transfer a deed without a lawyer, here’s what you need to know.
A Few Words on Selling After Inheriting
If the homeowner is not survived by a co-owner with survivorship rights, and there is no valid transfer on death deed, then the home will be transferred as directed by the deceased owner’s will. Its new owner will be named on the deed by order of the probate judge.
☛ What if the house deed and the last will do not agree on what happens after the death of the owner? See more from Deeds.com here on what to do if the will’s instructions conflict with the vesting on the deed.
If there is no will, the house will go to the nearest relative as identified by the state.
If you’re the heir, and the home’s debt has been cleared in probate, you might decide to move in. Be prepared to pay the taxes and insurance premiums.
Of course, you can always sell later. The timing of that decision is the key in tax planning.
Consider an example. You inherit a home valued at $300,000. Later, you decide to sell it for $330,000. You must pay capital gains tax, but only on the $30,000 gain. (This is a good thing, as you needn’t worry about the profits that the deceased person would have realized. Inherited homes come with a stepped-up tax basis — the fair-market value of the property upon the prior’s owner’s death.) The tax rate would equate to income tax if you sell within a year. You get the benefit of the long-term capital gains tax rates if you hold the property more than a year.
Best of all, if you decide to treat the home as a primary residence for two (out of five) years before selling, you can exclude up to $250,000 of your profit ($500,000 for couples filing jointly) from the capital gains tax. Another benefit of living in the home? Keeping the homestead property tax break. Many local governments allow the homestead tax reduction to encourage home occupancy by owners.
☛ Still have questions? Deeds.com is pleased to offer our readers a key to probate deeds, and related guidance. See Your Real Estate and Probate.
Every Location Has Its Own Probate System
As always, we offer this article to our readers for general knowledge and informational purposes. Neither this website nor any other provides legal counsel. Only a formal attorney-client relationship can provide case-specific advice.
Every state has a unique set of probate laws. Each county probate court has particular rules and practices to follow. Yet probate also has a few general principles. We hope the above review can help you get an idea of what to expect when you sell a probate home, and where to start.