Inheriting Real Estate: How to Help Your Clients

A real estate professional who is helping a client with inheriting real estate should provide advice on how to determine the value of the property, and how to dispose of it, in a timely manner—so that the process will run as smoothly and quickly as possible when the time comes.

Learning the basics of the appraisal process

If you’re a real estate professional working with a home or income-producing property that’s part of an estate, you or your client will probably need to have it appraised during the estate settlement process, before the property is sold. This is usually a straightforward process when it comes to inheriting real estate. However, it’s important to understand the appraisal process because complications can arise, mainly due to the fact that the appraisal must be a snapshot of the property at the time of the owner’s death—not at the time of a loan application.

The appraisal is important for inventory purposes, if the estate goes through probate, and for reducing all assets to their dollar value so that they can be fairly divided among multiple beneficiaries. The IRS will probably require an appraisal for the purposes of levying inheritance and capital gains taxes — and it’s not a good idea to let the IRS do the appraising.

“Mostly, estate appraisals are the same as appraising for a bank loan,” says Dana Grover, owner of Dana Grover and Associates in San Jose, California. “For estate purposes, you’re using a retrospective appraisal date, which means you’re usually going back a month or two, although I’ve done appraisals where I had to go back 30 years because the heirs just never got around to having the job done in a timely manner.

“The IRS uses a slightly different definition of ‘market value’ than is used for other appraisals, and we always have to make certain assumption about the previous condition of the property. If the owner died recently, that’s no problem, but sometimes the heirs have gone in and fixed it up, repainted, put in new carpets, and so on.”

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Understand how appraisers make assumptions

Sometimes the appraiser is able to find detailed information about renovations to the home, but sometimes assumptions need to be made when it comes to inheriting real estate.

Grover notes, for example, that most appraisers have a good idea of what an original kitchen from the 1950s would have looked like — and it’s likely that that kitchen would have stayed much the same, up to the owner’s death in, again for example, 1990. The appraiser will have to find comps for 1990, which is usually easy to do.

“Sometimes there are limits to how far back you can search through MLS, so you have to look at purchase records and make assumptions,” says Grover. “You state your assumptions in the appraisal. I once appraised a property that had started out as a little cabin, then rooms were added, then it underwent a total remodel and further expansion. I had to do three appraisals: one for each situation.

“Another time, I appraised a property located on a landslide in the Santa Cruz Mountains, and I had to appraise it in the condition it was in prior to the landslide. Following that event, the house was still livable, but one part of the house was on a level about a foot lower—and since it is on a landslide, it has the potential of moving again, so we had to take that possibility into account.”

Make the decision whether to sell the property or hold on to it

Of course, people inheriting real estate put the inherited property on the market and sell it. In some cases, the property will have to be sold almost immediately, to pay the estate taxes and avoid ongoing property taxes. In this case, if it’s sold in a timely manner, the IRS will usually accept the sale price as the property’s fair market value.

Selling a property immediately does have its complications. If the property still has a mortgage on it, that will have to be paid as well—and in some cases, the death of the borrower will cause the lender to demand immediate repayment. Real estate professionals who are working with an inherited property that’s mortgaged will have to examine the terms of the loan.

In many cases it will make sense to hang onto the property till market conditions are more favorable. If the estate goes through probate, the sale will certainly be delayed.

A real estate professional should also, in many cases, be prepared to dispose of the property in a 1031 exchange, by which the new owners can defer capital gains tax by selling it and buying a “like kind” property with the proceeds.

Whether or not the property is to be sold immediately, the sooner it’s appraised, the better. That might not preclude the need for another appraisal later, but having a figure in hand will generally make life easier for all parties.

Remember the details when working with your clients

The little details are what can set you apart when you’re working with your clients on inheriting real estate.

One important detail not to overlook is insurance. It’s smart to advise your clients to have the property insured as soon as they can. If it incurs liability, or is damaged, the heirs must be protected.

Another detail is to find the right appraiser. Any appraiser with a designation from a recognized professional appraisal association is automatically considered qualified in the eyes of the IRS. Clients who need appraisals for estate purposes choose an appraiser who holds a designation, just to be on the safe side. Merely being licensed or certified by a State does not invariably make one qualified for IRS purposes.

Use empathy throughout the process of inheriting real estate

Working with inherited real estate can be difficult for clients, especially if the inheritance is a recent one or if the property has many memories associated with it. It’s important to gently coach clients through all of their options and have patience while they take time to make their decisions.

About the author

Joseph Dobrian has been writing about commercial and residential real estate, and real estate-related finance, for more than 30 years. His by-line has appeared in The Wall Street Journal, The New York Times, The New Yorker, Real Estate Forum, Journal of Property Management, and many other publications. He is also a noted novelist, essayist, and translator. His website is www.josephdobrian.com, and he can be contacted at jdobrian@aol.com.

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