Currently, only thirteen states in the USA impose an estate tax on inherited wealth, and only six of these insist that the heir pays this amount. Tennessee is not one of these.
However, if you inherit a home from a relative, you will need to pay the federal estate tax, subject to certain conditions. Are you the unlucky recipient of a house you neither want nor need and wondering how this applies to you?
Keep reading to find out more about the taxes on inherited property in Tennessee and how you can get around them.
Types of Taxes on Inherited Property
There are two main types of taxes applicable to inherited properties in Tennessee. These are:
Estate Tax
There are pretty complex laws involved in estate tax in the USA. However, these only apply if you inherit more than $12.06 million in your lifetime.
Above that threshold, tax rates are between 18 and 40% of the amount exceeding the limit. In most cases, the IRS takes its cut from the spoils before allocating the rest of the funds.
That means you needn’t worry about paying any estate or inheritance taxes yourself when you live in Tennessee and you inherit a home.
If you live in a different state from the property’s location, you might still pay inheritance tax.
Property Tax
In Tennessee, you pay property taxes according to a formula established by the Comptroller of the Treasury. That means paying taxes of around $800 for a house worth $100,000, depending on the tax rate set by your County Commission.
In Nashville, there are two different tax rates, depending on whether a property is in a General Service District (GSD) or an Urban Service District (USD). The legislative bodies and the mayor of each municipality set these tax rates.
These rates are higher in urban areas with more intensive services like garbage pick-up, streetlights, and sidewalks. In the General Service District, homeowners pay individually for these conveniences.
So, if you can’t benefit from occupying the home yourself, an inherited house can end up being more of a financial burden than a blessing.
Other Expenses Associated with Inherited Houses
Apart from property taxes, an inherited home costs as much to run as your primary residence. Some of the expenses you’ll incur include:
- Cleaning
- Utilities
- Maintenance and repairs
- Insurance
- Garden services
If you don’t live in the home, you’ll likely need a security system or service to keep it safe from vandals, too.
Solutions for an Unwanted Inherited Home
There are two ways to relieve the financial woes associated with an inherited house. These are:
Finding Tenants for Your Inherited Home
You could recoup some of the costs associated with your inheritance by renting it out to tenants. If the home is in good condition, this is an easy and possibly profitable option.
In cases where the home is in disrepair, you’ll need to pay for costly upgrades and wait for the contractors to finish the work before you can find a tenant. In some cases, you might need to pay for a costly and time-consuming home inspection, too.
To make the most of renting out your property, you’ll need to employ a property manager to oversee tenant screenings, rental collections, and upkeep of the building. This can eat into your earnings a little.
Otherwise, you’ll need to spend time and energy overseeing these aspects yourself. After all your efforts, you may end up with tenants who don’t pay the rent or cause expensive damages to the house.
Getting rid of bad tenants can become an expensive legal minefield.
Selling Inherited Property
The best way to deal with an unwanted home is to sell it. This also involves considerable costs, and you will need to pay capital gains tax on the proceeds of the sale.
When you work with a real estate agent on the sale, you can expect to pay at least 5% of the selling price to both your real estate agent and the seller’s agent.
Negotiations over the selling price can take time and result in you achieving less from the sale than you’d hoped, and you’ll likely need to pay for a home appraisal and a home inspection during this process.
After all that, the buyer might not get a mortgage approval, so you’ll start the entire process again. If they do get a mortgage, you’ll need to pay considerable closing costs before you receive money from the sale.
You can opt to sell the home yourself and save on paying the real estate agent’s commission, but this is another time-consuming and complicated process.
The easiest way to sell an inherited property, especially if it’s in less than ideal condition, is to engage with a cash home-buying company.
You might sell the home for a lower price when you go this route, but you could end up with more money in your pocket. You’ll also pay fewer capital gains taxes when you sell the home for less.
Cash investors make a once-off offer, they don’t demand any repairs, and they can close on the date of your choosing. They buy houses in any condition and don’t waste your time haggling.
It’s a simple process that saves time and money.
Sell Your Inherited Home Fast
In summary, taxes on inherited property are only a small portion of the costs associated with the home. You’ll still need to pay holding costs if you decide to keep it.
Renting the house to tenants comes with additional management costs and selling it involves commissions, closing costs, and expensive repairs.
If you’d like to deal with an inherited property in the fastest and most cost-effective way possible, get in touch, and we’ll take it off your hands, no matter what.
