This guide will focus on selling inherited property in Massachusetts. For some, it’s an easy decision, as cashing in on the equity means a dramatically different financial decision. For others, the decision is harrowing, especially while you’re still grieving.
Massachusetts Probate Process
To legally transfer the property of a deceased individual, it must go through the probate process. The probate process takes around 12 months. It can take longer if there are multiple heirs and/or disputes. Within this period, creditors have a year (after the death) to come forward with claims against the estate.
Here’s a general overview of the process:
- Filing the Will and Petition: The process begins by filing the deceased’s will (if one exists) and a petition for probate in the Probate and Family Court in the county where the deceased lived. Depending on the complexity and specific needs of the estate, this petition can be for formal or informal probate.
- Appointment of Personal Representative: The court appoints a personal representative (formerly known as an executor) to handle the estate. If the will specifies someone, they are usually appointed, subject to approval by the court. The court appoints a representative based on state laws if there’s no will.
- Notice to Heirs and Creditors: The personal representative must notify the decedent’s potential heirs, beneficiaries, and known creditors. Massachusetts law also requires the personal representative to publish a notice in a local newspaper to inform potential creditors.
- Inventory of the Estate: The personal representative is responsible for compiling a detailed inventory of the estate’s assets, including real estate, personal property, and financial accounts.
- Paying Debts and Taxes: The estate’s debts, including any taxes owed, must be paid. If the available cash is insufficient, selling estate assets to cover liabilities may be necessary.
- Distributing the Remaining Assets: Once debts and taxes are settled, the remaining assets are distributed to the beneficiaries as directed by the will or according to Massachusetts intestacy laws if there is no will.
- Closing the Estate: The personal representative files a final account with the court, detailing all transactions and distributions from the estate. Upon approval, the estate can be officially closed.
Alienation Clause
An alienation clause, also known as a “due on sale” clause, is commonly found in mortgages and other types of loans. This clause allows the lender to demand full repayment of the loan if the property securing the loan is sold or transferred to another party.
However, there are specific exceptions and protections under federal law:
- To a relative resulting from the death of a borrower.
- Between spouses resulting from the death of a spouse.
- Into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.
This means that in many cases, heirs can inherit property with an existing mortgage without being forced to immediately pay off the mortgage, as long as they continue to make the regular mortgage payments.
Formal vs. informal Probate
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Informal probate is a simplified, less formal process used when there are no disputes or complications expected in settling an estate. It is typically faster and less expensive than formal probate. |
Formal probate is more complex and is used when there are disputes over the will or estate, or when the estate’s situation is legally complicated. It can be necessary in various scenarios, such as when the validity of the will is questioned, or if there are unclear aspects of the estate that require judicial intervention. |
Properties Exempt From Probate
In Massachusetts, certain types of property are exempt from probate, allowing them to pass directly to beneficiaries without needing court involvement.
- Jointly Owned Property: Property owned in joint tenancy with rights of survivorship automatically passes to the surviving owner(s) upon the death of one owner. This includes real estate, bank accounts, and other assets held jointly.
- Living Trusts: Property held in a living trust is not subject to probate. The trustee can distribute these assets directly to the beneficiaries according to the terms of the trust, bypassing the probate court.
When Not All Siblings Want To Sell
The first step is usually for all parties to try to reach a mutual agreement. Discuss the reasons for selling or keeping the property, evaluate each sibling’s financial needs and emotional attachments, and consider other practical factors such as the cost of upkeep and potential appreciation in property value.
Buyout
If one or more siblings want to keep the property while others want to sell, those who want to keep the property can offer to buy out the interests of the others. This requires getting the property appraised to determine its fair market value and agreeing on a fair buyout price to everyone involved.
Partition Action
If no agreement can be reached, any co-owner of the property has the right to seek a legal remedy called a partition action. In a partition action, a court is asked to intervene to order the division or sale of the property. Here’s how that might work:
- Partition in Kind: The court might order a physical division of the property, but this is only practical in certain cases, such as undeveloped land that can be easily divided.
- Partition by Sale: More commonly, especially with single residences like a family home, the court will order the property to be sold and the proceeds divided among the siblings according to their ownership shares.
How To Sell An Inherited Property
Selling A Property With Multiple Inheriters
When several individuals inherit a property, such as siblings inheriting a family home, each has equal rights but may not share the same goals. Some might prefer to sell the property and liquidate their share, while others might wish to retain it for personal use or as an investment.
To proceed with a sale, all parties must agree. If an agreement can’t be reached, other parties can buy out the other’s shares. If disputes continue, any co-owner can file a partition action, requesting legal intervention. This often results in the court ordering the property to be sold and the proceeds divided among the inheritors according to their ownership stakes.
Selling An Inherited Property In Foreclosure
When an estate inherits a property already in the foreclosure process, thy should take immediate action to prevent loss through a forced sale by the lender. Heirs have the option to sell the property quickly to settle outstanding debts before the foreclosure concludes, which might be a practical choice if the estate lacks liquid assets to cover the mortgage arrears.
Fast sales often involve selling below market value, but they can prevent further credit damage and legal complications. Engaging with a real estate professional experienced in distressed properties can guide heirs through this expedited selling process efficiently.
Can You Reject An Inherited Home?
Yes, you can reject an inherited home. There is one situation where you may not want to embroil yourself in the mess of a new home.
- There’s a significant mortgage on the home and it’s underwater. This means that the mortgage amount owed on the house is higher than the value of the house.
The IRS requires that if you refuse an inheritance, you must execute a written disclaimer. This disclaimer clearly expresses your “irrevocable and unqualified” intent to refuse the bequest.
Taxes On Inherited Property
Speaking of taxes, you won’t get away scott free in Massachusetts if you inherent a property. Let’s break it down.
- Inheritance Tax: Massachusetts doesn’t impose an inheritance tax.
- Estate Tax: Massachusetts is one of 12 states that impose an estate tax on residents and non residents. This state-level tax is on the transfer of a deceased person’s estate. The exemption threshold is currently $2 million. The federal estate tax threshold is currently $13.61 million per individual. These tax rates are progressive, starting at 0.8% and rising up to 16%. The estate tax must be paid before the estate can be fully settled and distributed to heirs.
- Transfer Tax: Transfer tax is a one-time fee assessed at a rate of 0.546% of the total value of the property. An estate valued at $500,000 will owe a transfer tax of $2,730.
- Capital Gains Tax: Capital gains tax is due on the sale of all real estate unless the homeowners qualify for a tax exclusion or deferral. The tax rate ranges from 15% to 20% federally and 5.2% to 12% in Massachusetts. Taxes only apply to the “gain” or profit from the sale.
When To File Taxes
Individual federal and state income tax returns are due by tax day of the year following the individual’s death. If your estate is worth more than $2,000,000, you’ll need to file an estate tax return.
Calculating Capital Gains Tax
When you inherit property, such as real estate, your tax basis in the property is “stepped up” to its fair market value (FMV) at the date of the original owner’s death. This means that capital gains tax, which is levied on the profit made from selling an asset, is calculated based on the value of the property at the time of inheritance rather than what the original owner paid for it.
Here’s how that works.
Suppose you inherited a house from a relative who passed away. The FMV of the house at the time of their death was $300,000. This becomes your stepped-up basis. Two years later, you sell the house for $350,000.
- Stepped-Up Basis: $300,000
- Sale Price: $350,000
- Gain: $350,000 – $300,000 = $50,000
Assuming you’re subject to a 15% capital gains tax rate, the tax you would owe on the sale would be 15% of $50,000, which equals $7,500. This stepped-up basis rule significantly reduces the potential capital gains tax liability, making it a key factor in estate and tax planning.
Reducing Capital Gains Tax On Inherited Property
Sell Right Away
Selling an inherited property immediately can reduce or eliminate capital gains taxes, especially if the property’s market value has not significantly increased since the date of death. The stepped-up basis we explained equals the market value at the time of the original owner’s passing
If the assessed market value at the date of sale is the same as the time of death, then you’ll pay zero capital gains tax. Don’t rush to sell just for the potential financial savings. This could be to the detriment of higher potential gains.
Convert to Primary Residence
Transfering an inherited property into your primary residence can leverage a significant tax exemption. If you reside in the home for at least two of the five years prior to selling, you can exclude up to $250,000 of the gain from capital gains tax if you file singly, or up to $500,000 if filing jointly. This strategy can be particularly advantageous if the property’s value has substantially increased over time, potentially saving a considerable amount in taxes.
Leverage a 1031 Exchange
For those holding inherited properties as investments, utilizing a 1031 Exchange can defer capital gains taxes. By reinvesting the proceeds from the sale into another similar (like-kind) investment property, the capital gains taxes can be deferred. This deferral can continue through subsequent investments via 1031 Exchanges, potentially allowing the investment to grow tax-deferred over a longer period.
Selling Inherited Property In Massachusetts
This guide offers a comprehensive overview of the legalities of selling inherited property in Massachusetts. Whether you are considering a quick sale to avoid capital gains tax, contemplating making an inherited property your primary residence, or dealing with disputes among multiple inheritors, it’s essential to approach these decisions with both legal prudence and sensitivity to the emotional implications.
