5 Things You Need to Know About Inheriting a House in Chicago
Even a “free” house often comes along with costly baggage and debts. When you inherit real estate you need to know what to expect, so you can stay out of legal trouble and avoid making tax mistakes that could cost you thousands of dollars. Here’s your stress-free guide to inheriting a house – and how to sell it for cash.
1. You Should Ask an Estate Attorney for Legal Advice
In the state of Illinois, real estate held in joint tenancy passes directly to the joint tenants. Most other property passes through probate, meaning that a judge must approve the final accounting as filed by the state administrator.
Before you do anything else, it’s a good idea to seek out legal help. Find out as much as you can about the legal disposition of the property. Check the status of the title and the mortgage. Find out whether there are any liens on the property.
If you’re thinking about selling the home, know that it must be sold by the estate as designated under the will. If there is no will, you may have to ask the probate court to grant you the authority to sell the home and distribute the proceeds.
2. You Don’t Have To Claim the House If You Don’t Want It
Even if you’re supposed to inherit a house, you may decide that you don’t want it. If the mortgage is underwater, meaning that the amount owed on the house is greater than its value, you may be better off letting the house go into foreclosure.
If you decide not to take the house, speak to an attorney right away about filing paperwork to disclaim the property.
3. You Don’t Have To Pay Any Inheritance Taxes in Illinois
There is no inheritance tax in the state of Illinois. There is an estate tax, but it only applies to estates with a value in excess of $4 million. But even then, you may have deductions available to reduce your tax burden.
Note that there is also a federal estate tax, which is separate. It affects estates larger than $5.49 million (as of 2017), meaning that most estates won’t pay estate taxes, either.
4. You Can Avoid Capital Gains Tax on Inherited Property in Illinois
When you sell your own home, the taxes you pay are based on your profit: the difference between the purchase price and the selling price. But the rules for selling an inherited house are different.
When you sell a house you inherited, you will have to pay capital gains based on the difference between the selling price and the current appraised value (also called the “stepped-up basis”). The original amount that the deceased owner paid doesn’t matter.
For example, if your parents originally paid $150,000 for a house, but it’s worth $400,000 when you inherit it, then that higher amount becomes the basis. If you sell the house for $410,000, you’ll only pay capital gains on the difference ($10,000), rather than the full value.
If you take a loss and sell the house for less than the appraised value, then you can actually deduct the loss (up to $3000 per year) and avoid paying any capital gains tax.
5. You Can Sell an Inherited House for Cash
Does the house need to be fixed up before you can sell it? Start with a thorough inspection of the property. Then add up the total cost of materials and labor (including yours), and add another 20 percent for unforeseen problems. That gives you an idea of what you would have to pay for repairs.
If the cost is out of your budget, or if major repairs are needed – plumbing, electrical system, roof, foundation, and so on – you may be better off selling to a real estate investor. Investors are more likely to buy the house “as is” and make you a cash offer. That way, you can sell the house quickly and easily, without spending money to fix it up.