Selling a house is never easy, but when it comes to real estate held by an estate (in probate or in a trust), the emotional complexity and legal nuances can amplify the challenge. You may be an experienced seller when it comes to your own property but selling the property of a loved one who has recently passed is not the same. Understanding the key differences is crucial for a smooth and successful transaction.

  1. Who Makes Decisions?

  • Your Own Property: Selling your own home is straightforward. You are the sole owner and the decision to sell, as well as each subsequent decision within the process, rests only with you. You, likely based on your real estate agents advice; decide the sales price, what repairs or improvements to do before offering your home for sale, what offers you will consider, what buyer requested repairs you will agree to, and how to resolve issues as they arise.

  • Estate/Trust Property: When someone dies leaving real estate behind, the power of decision making depends on a few things. First, ownership of the property needs to be determined. After all, the deceased might have been renting, or a co-owner with others, or the sole owner of the home.

Once confirming ownership, a review of any wills and/or trust agreements will dictate who has the authority to make decisions. If the property is held in a trust, the trustee has the power to act according to the trust document. If there is no trust, the state’s probate process comes into play. See https://www.courts.ca.gov/8865.htm?rdeLocaleAttr=en

The probate court will appoint a personal representative to work with the court to settle the probate estate. If there is a will, the probate court needs to validate the will. If no valid will exists, the property will pass to the heirs in accordance with state law. Once in probate, the executor (if there is a valid will) or the administrator (if no valid will) has the authority, shared with the probate court, to decide how to administer the probate estate. The court may have the power of approval before finalizing the sale of the home. See our previous blog here.

In a trust or probate sale of real estate, the representative (executor or administrator) of the estate will need to assemble a team of professionals in order to navigate this complicated process. It is important to use a real estate agent that is familiar with this intricate process in order to avoid unnecessary problems or delays.

  1. What Controls the Timing and Flexibility of the Sale?

  • Your Own Property: You have the liberty to choose the listing timeframe, price, and negotiation terms. Once you are under contract with a buyer, your timing may need to adjust to accommodate the buyer and their lender; however, you have quite a bit of control and you do not need to coordinate with a slow court system.

  • Estate/Trust Property: Timeframes can be restricted due to legal requirements or beneficiary needs. Particularly, in probate, the probate representative might need court approval, impacting timing and flexibility. American Bar Association. (January 19, 2024). Real Estate & Property Law Section. https://www.americanbar.org/

  1. What About Financial Considerations?
  • Your Own Property: Money comes into play both before and after the sale of the property. Doesn’t money always drive the process? Before the sale, most sellers have the choice of whether or not to invest money into the property before selling in order to maximize the subsequent sales price. Many times, making repairs or improvements can result in additional value beyond the cost of such investment.

After the sale, net proceeds (after payment to the lender, tax authority, and any other encumbrances) belong to you and are distributed at closing. Capital gain taxes might apply unless you meet the requirements to shelter some, or all, of the gain under IRC Section 121 (Exclusion of Gain on the Sale of Your Home). If your property is an investment property, other IRS rules such as IRC Section 1031 (Exchange of Like-Kind Property) may allow you to defer gain on the sale.

  • Estate/Trust Property: Similar to selling your own home, the choice of investing in the home before the sale of the property is available to the estate representative but, practically, many times there is no money available for small repairs or improvements liquid in the estate. Thus, there may be no opportunity to maximize the sales price of the estate home. This is why many probate or trust sales involve homes that have deferred maintenance.

After the sale of the home, the net sale proceeds are paid to the estate or trust. There is likely no capital gains for tax purposes since the property likely received a step-up in basis at the time of death. So, if the home is sold quickly, there is likely no additional gain.

Further, net proceeds are only distributed to the heirs or beneficiaries, according to the legal documents or state law, once the estate is in the position to distribute the assets (cash). The estate/trust may be responsible for settling debts, taxes, and administrative costs before beneficiaries receive their net share from the sale of the property. Under probate, it can take 6-18 months or more to close the estate!

If any capital gains do exist they may be paid by the estate before distributing the probate assets.

  1. How is Disclosure Different?

  • Your Own Property: In California, the seller of the home is required to disclose to the buyer known material or significant items affecting the value or desirability of the property. (California Association of Realtors, Quick Guide https://www.car.org/-/media/CAR/Documents/Transaction-Center/PDF/QUICK-GUIDES/Quick-Guide—Seller-Property-Questionnaire.pdf )

  • When the property is your own home that you lived in and maintained, you know a lot about your home and you are required to share that knowledge with the buyer during the due diligence period.

  • Estate/Trust Property: The estate representative may not have a great deal of direct knowledge of the home since they may not have lived in the home; or only lived in the home many years ago. So, there are some disclosure requirements that California does not require for a trust or probate sale of real estate. However, if the estate representative does have actual knowledge of such items, they must still be disclosed.

  1. How does Emotion Play Into It?
  • Your Own Property: It’s often a personal decision, driven by life changes or desire. Emotions can range from excitement to nostalgia.
  • Estate/Trust Property: Selling often represents closure and fulfilling the wishes of the deceased. Grief and the desire to honor their memory can complicate the process (American Psychological Association. (January 9, 2024). Grief. https://www.apa.org/topics/grief).
  1. Who Brings the Expertise?
  • Your Own Property: You can likely manage your own legal and tax matters related to your own sale of a home. However, you should use an experienced real estate agent to navigate the process and maximize your net proceeds while limiting your liability.
  • Estate/Trust Property: An attorney specializing in estate law is crucial to navigate complex legal and tax issues, ensuring compliance with relevant regulations. Involving a real estate agent familiar with probate or trust sales is strongly recommended. They can navigate legal hurdles, work closely with your attorney, and ensure ethical and legal compliance.

BONUS TIP: Benefits or a trust versus a probate process

It is important to point out that selling a home that falls into probate can be much more difficult and expensive as compared to a home held in trust. A home inside a trust features a trustee following the trust document executed by the deceased. This is a quicker process since permission to sell is not needed from a probate court. And it is less costly since there are no court required fees to a Probate Administrator or Probate Attorney. See(Cal. Probate Code § § 10810, 10811.) A trust document may provide for such fees to the successor trustee or the estate attorney but it is not mandated by a court. So, there are big benefits to doing some estate planning now!

Team Plunkett is a Certified Probate Specialist putting the “estate” in real estate. Contact us today for a free consultation to get started on a sale of real estate in, or out, of an estate.