Does an Heir Inherit Equity or Market Value?

By John Cromwell

An heir is someone who inherits property from an estate. The traditional definition of an heir is someone who inherited property, due to being related to the decedent, when the decedent left no will. The modern definition of an heir encompasses everyone who receives property from an estate, whether through intestacy or as a beneficiary in a will. Regardless of which definition is used, whether a person receives the equity or market value of estate property depends on the probate process and the terms of the will.

Equity Versus Market Value

Equity is the value of a property minus the amount of the person owes on the loan against it. The market value is how much a person would get if she sold the asset on the open market. This assumes that the “seller” is not under any pressure to sell the item and that the “buyer” does not have any pressure to obtain the asset. For example, assume someone bought a house for $400,000 subject to $200,000 mortgage but could sell it for $500,000. The equity value of the house is $300,000, but the market value is $500,000.

Probate Process

Probate is a state regulated judicial process meant to facilitate the distribution of a decedent’s assets to the proper recipients. When a decedent dies, the court will review any available will, certify it and appoint the executor named in the will to oversee the estate. If there is no valid will, the court will generally appoint a family member of the decedent to oversee the estate. The executor will gather all of the decedent’s probate assets and generally pay off the decedent’s debts. Once the debts are paid, the executor will distribute what remains, based on the decedent’s will or if there is no will, based on the state’s intestacy code.

Get a free, confidential bankruptcy evaluation. Learn More

Heir's Portion

Generally the heir will receive the market value of any property he receives from the estate, because during the probate process, the executor will pay off all outstanding claims, assuming any assets remained in the estate after all debts were settled. This would include mortgages and other liabilities attached to property. However, because mortgages have some tax benefits, it might not be in the best interest of the eventual recipient of a mortgaged property to have the debt paid off. If the will gives the executor the discretion to not pay off a mortgage on a property and the lender agrees, the recipient might only receive equity as opposed to market value.

Tax Basis

While a person is not taxed on the property she receives from an estate, she may be taxed on the proceeds she receives when she sells the asset in the future. "Basis" is the value of a taxpayer's investment in property and is used to calculate gain or loss on the sale of an asset. The basis of property received by a person from an estate is measured at its market value as of the day the decedent died. So if a house was worth $200,000 when the decedent purchased it five years before but is worth $300,000 on his date of death, the heir's tax basis is $300,000. The basis generally remains constant, unless the beneficiary makes additional investments and improvements to the property.

Selling Inherited Property

When the inherited asset is sold, you would subtract its tax basis from the proceeds from the sale to determine the taxable gain or loss. Assume a beneficiary had a basis in a house of $200,000 and later sold it for $300,000. She would have a taxable gain of $100,000. However, in the rare situation where the heir took over he mortgage on the inherited property, any outstanding loan amounts due would be subtracted from the proceeds of the sale.

Get a free, confidential bankruptcy evaluation. Learn More
Estate Settlement & Division of Property From a Will

References

Resources

Related articles

Can the Executor of a Will Spend the Money Any Way He Wants?

When someone dies and leaves a will, the will instructs how the deceased's property should be distributed. Likely, it will name the individual responsible for managing the estate, the estate’s personal representative, or executor. The executor has a duty to prudently manage the estate so that debts are paid and each beneficiary receives his due distribution.

Does a Will Override a Warranty Deed?

Wills and warranty deeds are two methods of transferring real estate. Wills transfer the probate property of a decedent to specific individuals identified in the document. A warranty deed transfers property from a seller to a buyer while both parties are still alive. While it may appear that these documents do not influence each other given when each is executed, several sets of circumstances exist in which one can influence the other.

Does a Beneficiary Need to Change the Title of a House Before Selling?

The legal transfer of real estate doesn’t happen magically in life, but strangely, it can in death. In some states, real estate vests in a beneficiary named in a will at the time of the property owner’s death There’s no legal reason to change the title. But if you want, or if your state requires, changing the title is usually a simple procedure accomplished in probate.

Related articles

Does a Quitclaim Deed Pass to the Heirs?

When a person dies, a significant portion of his property passes through the probate process to be divided and ...

The Advantages of a House in a Living Trust

A living trust is created by a trust deed and becomes effective while the trust grantor is still alive. During the ...

Can the Executor of an Estate Be Held Responsible if the House Goes Into Foreclosure?

When a testator, the person making a will, names a trusted friend or family member as executor of her will, she often ...

Can You Be Forced to Sell a House You Inherited to Pay Off the Medical Bills of the Deceased?

Even in death, people are responsible for their own debts -- at least to the extent that they leave enough money behind ...

Browse by category
Ready to Begin? GET STARTED