Should You Buy Your Parents’ House Before Death?

Those tasked with selling a parent’s house before death, in particular, are up against an emotionally and financially complex process. Going about selling an aging parent’s house before death the right way can be difficult, and the slightest misstep can welcome countless financial and legal burdens. And while we aren’t attorneys, accountants, or financial advisors, we are interested in demystifying complicated processes for all those who find themselves in this position. Continue reading for everything you need to know about selling a parent’s home before death, family caregiving, and alternative pathways that may be right for your family.

When & Why You Should Sell Your Parents’ House

If you’re still considering if selling your parents’ house is the right decision, here are some circumstances to consider:

• Not financially beneficial - Turning the house into a rental property isn’t financially beneficial
• If you live far away - If you live far from the home, don’t want to move in, or don’t like the idea of being a landlord
• Access to home equity - Selling the house gives your parents access to the equity they have built up from the home loan
• Financial planning - Selling the house before death allows your elderly parents to use the proceeds from the sale for their financial needs, such as medical expenses, financial planning for retirement, or to improve their quality of life during their remaining years
• Avoiding inheritance challenges - Selling the house before death can help avoid potential inheritance disputes
• Property maintenance -  Selling the house earlier may alleviate the need for ongoing property maintenance and upkeep, especially if your parents find it difficult to manage or afford the expenses

Is It Better to Sell a House Before Death? 

When selling an inherited home, families or those in control of their estate have the decision to wait until after the homeowner has passed. Choosing to wait, however, may open you up to unwanted tax liability or force the home to go through a potentially lengthy probate process. Depending on the state and the complexity of the will, probate can take as little as a year, still far too long for many families to spend in limbo. The probate process also incurs its own set of fees, which can quickly erode away any sale proceeds. While money may be the last thing on the mind of families facing the loss of a loved one, finances are still an important consideration for many. 

Probate (and the frustration and fees it can bring) aside, the tax liability children may face when selling a parent’s home after death can be the deciding factor. If a parent’s home is sold prior to their death, they may be exempt from substantial capital gains taxes. But should the inherited home be sold after their death, the opposite can be true. 

What Are the Tax Implications to Consider? 

As mentioned above, capital gains taxes are the most significant implication many families face when selling a parent’s asset following their death. The $250,000/$500,000 capital gain tax rule states that if the value of a home increases by $250,000 for a single tax filer or $500,000 for a joint filer in the time since it was purchased, the increase in value may be taxed. Considering a moderate home purchased for $100,000 40 years ago may be going for more than five times that today, this tax may be unavoidable when selling a parent’s home after their death. So, by making the sale prior to their death, you may be preserving tens of thousands in profit. 

When you or your parent sell their home prior to their death, you may be able to skirt capital gains taxes in the event that they meet certain criteria. Namely, your parents must have owned the home for two years, the home must have been their principal residence, and they must have occupied the home for at least two out of the last five years. If they lived with you while the property was being rented out, they might miss out on this tax break. Should your parent qualify for these tax breaks, the proceeds from the sale can be gifted to you and any other beneficiaries free of federal tax. 

What Are the Other Options? 

Selling a parent’s house before death may be the best way forward for most families, but there are other options that ensure a parent’s wishes are honored, and the parents' estate is passed to the proper hands. 

• Gifting the Property: Through irrevocable trusts, parents are able to gift their home to children during their lifetime while ensuring children and beneficiaries are protected from creditors. This gift will also be exempt from any estate tax but will likely incur some form of gift tax. Should a parent decide to transfer ownership of an asset or property upon their death, however, some tax liability can be reduced. 

• Selling the Home to the Children: When selling a parent’s house before death, the home doesn’t have to go to an outside party –– and some children may find that buying the parents' home themselves is the best option. With that said, there are many things both parents and children will need to consider to make this approach worthwhile. For one, the home must be sold at a fair market price. Should the sale price lean friendlier, children may once again find themselves at the risk of a gift tax. In the event that children cannot afford the home, parents may loan the children the money to finance the home. However, parents must charge their children interest in accordance with the IRS’ established minimum interest rate. 

Another alternative is transferring possession of the home to a trust or establishing a life estate. While these options can be beneficial, they may not work for every family and can become problematic should property disputes arise among the family. 

• Transferring the Deed: For real property owners in half of all U.S. states, a Transfer-on-Death deed may be a valuable alternative to selling a parent’s house before death. Here’s how it works: In states that allow a Transfer-on-Death deed, this tool can be used as a kind of “time-release” transfer. While a regular deed transfer takes effect immediately, this transfer will not be complete until after the original owner has passed away. 1 If your state is one where Transfer-on-Death deeds are allowed, you may be able to use this tool to avoid probate and easily transfer the inherited property title to yourself, other heirs, or another beneficiary upon death.

• Bequeathal of the Home: Many parents may find that, when considering the future of a home after their passing, establishing a revocable living trust may be the best way for this property to exchange hands. This gives parents and property owners complete control over how they want their property to be treated after death, allowing them to alter their estate planning at will. When establishing a revocable living trust, parents should ensure that their adult child or beneficiaries even want the property in the first place. To some, assuming ownership may be too much of a burden to bear; others may leap at the opportunity to care for the home in a parent’s absence. Regardless, open dialogue will be the key to ensuring a parent’s decision is the right one for both them and their family.

• Sell and Stay Transaction: No two families are the same, and every situation is just as unique. Some homeowners planning out their twilight years may be without children or other beneficiaries, and some may come to the decision that the parents' home is a responsibility no one is ready to assume. For those looking to make the most of their time with family without expending energy on estate planning, a sell and stay transaction may be the best option. In this scenario, homeowners sell their home in exchange for their home equity, trading a mortgage payment for a rent payment while continuing to live in the home as a renter. This equity can then be used for anything: travel, hobbies, or making memories with family members. In addition, some people’s aging parents find that the benefits of aging in place far outweigh those involved with a move.

For a full understanding of estate trusts and how these legal tools may work for your unique situation, contact a qualified trust and estate professional. 

How to Prepare for Selling the House Before Death

Despite the countless options outlined above, many will find that selling a parent’s house before death is the best option for all parties involved. But when selling a home under any circumstances, there are preparations that will need to be made to ensure you get the most out of the sale. Should you decide that this pathway is right for you and your family, you’ll have the option of listing with a realtor (or for sale, by owner) or selling to a real estate investment firm. No matter which avenue you choose, here’s how to take on this process. 

Listing with a Realtor

Despite the increasing popularity of homes sold to investors for cash, listing with a realtor or for sale by owner (FSBO) will likely see a higher sale price — making it the better option for many families. 

1. Assess the Home’s Overall State 

To understand your options moving forward, your first step will be assessing the overall condition of your parent’s home. If they are older, struggle with mobility issues, or have lived alone for some time, there is a possibility the home will need some cosmetic attention and possibly even extensive renovations. Further, you might find that there is excessive clutter to wade through — lengthening the time it will take to be able to list. Learning how to determine home value before a sale is key to a smooth process — both for you and your parent. Knowing this upfront will allow you to manage expectations, clear out mementos and cherished belongings, and begin exploring next steps.

2. Identify and Tackle Minor Improvements

Whether listing with a realtor or FSBO, you will want to ensure minor renovations have been taken care of. This may include things like repairing or replacing fixtures, touching up paint or adding a fresh coat when needed, tending to overgrown landscaping, or even bigger ticket items like replacing outdated appliances. If you’re unsure of the home’s current value or whether it can sell in its current condition, you may want to opt for a professional home appraisal or home inspection. Depending on what they find, you can brainstorm how to increase your home’s value. 

3. Find a Skilled Realtor

If you make the decision to sell your parent’s home for sale by the owner, you should be ready to begin listing your home at this point. However, considering homeowners typically make marginally less from an FSBO sale than with a licensed real estate agent, you might find that relying on a professional is the way to go. When looking for a realtor, consider three or four different professionals and ensure they are fully aware of the circumstances. The right realtor will be empathetic and sensitive to your situation while working on getting the most out of the sale — making their commission fee well worth it.

4. Determine Whether Larger Renovations Are Needed

With the help of a real estate professional, you can begin to decide whether your parent’s home is in need of more extensive repairs prior to listing. These can include quick-but-potentially-costly fixes like installing energy-efficient appliances or extensive projects like replacing an aging roof. Leveraging knowledge of recent sales in the area and extensive data, a real estate professional will be able to tell you which repairs might be worth it and which will be flat-out necessary to get the absolute most out of the sale. In some cases, you might not have the time to tackle major improvements, and your realtor will be able to recommend quick fixes which will still boost value. 

5. Accept an Offer and Begin Moving On

Once you’ve made any necessary improvements and have listed your parent’s home with the help of a professional, it’s important to have a dialogue about expectations from the sale. This should involve your parent(s), your realtor, your siblings and any other beneficiaries. Creating an open dialogue will give you all the best chances of being satisfied with the sale and will allow your realtor to operate confidently and with autonomy when it comes to negotiating. If and when an offer comes in, all involved parties can discuss and decide to take it (or not.)

From there begins the most difficult step of all: beginning to move on. While your parent may still be with you, letting go of a family home filled with memories can be a challenge — don’t fault yourself for struggling to let go.  

Selling to a Real Estate Investment Company 

Those selling a parent’s house before death may do so by listing with an agent or for sale by the owner, but they may also decide to sell to a real estate investor for a number of reasons. 

1. Make Sure It’s Right

In the event that the home is structurally sound but in need of deep cosmetic repair, the work needed to get the home ready to list may be too great, given the circumstances. A real estate investor will typically purchase the home as-is (with cash), eliminating the need for repairs on behalf of you, your parent, or your family. While this alternative typically nets a lower sale price, it also removes the possibility of a deal falling through on account of financing. 

These benefits may be enticing, but don’t let a heap of cash cloud your or your family’s judgment. Not all real estate transactions with investors are the best route. For example, some we-pay-cash companies prey upon older homeowners and desperate families, so be on the lookout for deals that seem too good to be true — they probably are.

2. Clear Out Possessions

One of the biggest advantages of selling a parent’s house to a real estate investor or real estate investment company is that, apart from gathering all personal belongings and clearing out ephemera, little will need to be done to the home. This makes this process far quicker than selling through an agent or for sale by the owner and can save thousands on renovations, repairs, and countless other fees associated with a traditional sale. With that said, investors are looking for the biggest profit margin possible, so selling through an agent or for sale by owner may still end up yielding the greatest profit. 

3. Move On

No matter the path you choose, whether listing with a qualified real estate professional, for sale by owner or selling to an investor, the process of moving on poses the greatest challenge. From here, you can begin navigating next steps for your parent(s) and your family and take solace in the fact that a massive (home-sized) weight has been lifted. 

Caring for Aging Parents

When aging parents can't live alone, part of a caregiver role strain is selling a parent's house before their death. It's one of the responsibilities they have to shoulder. 

Whether you’ve inherited the responsibility of looking after a parent’s estate or you’re educating yourself in anticipation of this duty, Truehold can provide you with helpful resources. Our sell and stay transaction provides flexibility for families navigating aging parents. Request our free info kit or check out our senior living resources for more information.   

‍

Sources:

1. Nolo. States That Allow Transfer-on-Death Deeds for Real Estate. https://www.nolo.com/legal-encyclopedia/free-books/avoid-probate-book/chapter5-1.html