Inheritance Tax on a foreclosure

Inheritance Tax on a foreclosure

Flipper/Rehabber · Manheim PA · Member since 2019 · 9 posts · 3 votes

Hi from Pennsylvania!

I am looking at a home that is foreclosure and is set to sell at a Sheriff's auction. The title search returned that the property is encumbered at 145K. The owner, who is still on the deed/title, passed away in March of 2019 and and estate was not set up. This means that inheritance taxes were not filed. I am trying to understand a worse case scenario of how this could affect me and the flip. I understand that this can cause problems for me when I go to resell because some title companies handle this type of case incorrectly. Apparently, PA is all over the map with a clear understanding of how it is to actually be handled. 

Lets say I purchase this 145k encumbered property for the price of 100K. I do the rehab and proceed to list and eventually sell it for 150K. What is the worst case scenario in regards to the inheritance tax? 

I have heard the following: 1 - If I pay under the encumbered value, there will be no issue. 2 - there is the potential that no matter what I pay, I could be held liable for the 15% inheritance tax on the full amount of the assesed value of the house at the time of the owner's death. 3 - If I pay 150k for the house, I would only be responsible to pay 15% inheritance tax for the difference of 145K (the debt) and what I paid, which equals 15% of $5000.  4 - Pay less than the encumbered amount and "direct" the sale to a title company who knows the law and what they are doing. If I do it this way, could this title problem show up again in later years if the next person want to sell the house? (to me, this is an ethical/moral issue that I do not want to be a part of) 5 - RUN away from this property as you could be facing over 20k of inheritance taxes and fees that would be a a total nightmare. Something a large scale company could handle, but not someone in my financial position. 


This could potentially be my second flip. I am working with cash and I am a single mom who does not have the luxury of making a costly mistake so early in this business endeavor. I do not qualify for a mortgage (yet!) because I was a stay at home mom for years, so what I have is all I have to invest. 

I would value your input and knowledge if you have any experience with Inheritance taxes/foreclosures/no estate/deceased owner. 

Thank you!

Renee

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Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
6y
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  • Investor · Lomita, CA · Member since 2015 · 145 posts · 71 votes
    6y

    Just a question... This property wouldn't have to go thru probate? The heirs wouldn't be given a chance to settle up with the bank?

  • Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    6y

    @Terrence Evans   A bank doesn't have to wait for probate, they just foreclose.  It is up to the heirs if they want to be proactive and prevent it.

    @Renee K. Others here have experience with inheritance tax in PA on sheriff’s auctions.

  • Investor · Lomita, CA · Member since 2015 · 145 posts · 71 votes
    6y

    @Wayne Brooks: I don't think that is always true.  I had a note on a TX property and I had to do just that.  It depends on the state law and the type of loan that is being foreclosed on.  Maybe PA is different, it being a jud state and all.

  • Member since 2020 · 113 posts · 33 votes
    6y

    With a foreclosure, the mortgage lender will take possession of the home if it doesn't receive scheduled mortgage payments over an extended period of time. Also, in many cases, the lender cancels your outstanding mortgage balance. Sometimes, this debt cancellation is taxable as ordinary income.

  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Terrence Evans:

    @Wayne Brooks: I don't think that is always true.  I had a note on a TX property and I had to do just that.  It depends on the state law and the type of loan that is being foreclosed on.  Maybe PA is different, it being a jud state and all.

    I am not sure what you are referring to as Texas does not have an inheritance tax

  • Investor · Lomita, CA · Member since 2015 · 145 posts · 71 votes
    6y

    @Greg H. I didnt say it did. I was talking about probate and having to wait until probate is complete before the court allowing me to FC... On home equity loans.

  • Title Representative · Cherry Hill, NJ · Member since 2015 · 48 posts · 31 votes
    6y

    Inheritance tax is owed on the value of the property at the time of death (or thereabout) minus the debts owed against the property.  Most title companies will require that you obtain a release or a notice of appraisement showing that $O is owed from the PA department of revenue.  Upon acquisition of the property you would need to request a release from the state or file an inheritance tax return, which can be done even if an estate has not been opened. Seek advice from an experienced estate attorney. 

    Another thing is that the state will not use your purchase price as the value of the property.  You can use the county assessed value x the county common level ratio or an appraisal. 

    The goal is to get the value to be less than the debt so that the tax will be zero.  Otherwise you will owe on the difference. 

    The tax rate depends on the relationship of the heirs to the deceased.  Direct defendants = 4.5%, siblings = 12%, and others = 15%.  

  • Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    6y

    @Terrence Evans @Wayne Brooks

    I can back up Terrence with regard to TX HELOCs and probates. I've had two of them. First of all, you have to foreclose judicially on TX HELOCs. If the borrower dies, you have to address it through the courts before you can foreclose. If no probate has been opened, the court will require an ad litem attorney to represent the estate specifically for that property. It's a big pain to deal with.... 

  • Investor · Lomita, CA · Member since 2015 · 145 posts · 71 votes
    6y

    @Andy Mirza: Huge &^#$%# pain. It took me almost 3 yrs to go to auction.  In Texas.. not New York. And that barely happened before COVID shut everything down.

  • Flipper/Rehabber · Manheim PA · Member since 2019 · 9 posts · 3 votes
    6y

    @Greg Wilkins - Very helpful! Thank you.

  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Terrence Evans:

    @Greg H. I didnt say it did. I was talking about probate and having to wait until probate is complete before the court allowing me to FC... On home equity loans.

    Ahhhh. Yes you are correct and this is only for HELOC loans as the process is very simple and quick for mortgages and can happen in less than 60 days from start to finish

  • Flipper/Rehabber · Manheim PA · Member since 2019 · 9 posts · 3 votes
    6y

    @Wayne Brooks Yes! I found a very helpful conversation about it. I was not being specific enough in my search. Thank you! 

  • Attorney · Austin, TX · Member since 2014 · 888 posts · 759 votes
    6y

    Even a 1st lien, purchase money mortgage can have this problem in Texas.  The problem is that notices can be deficient if the persons with an interest in the property are unknown or unreachable, making non-judicial foreclosure impossible.  Anyone with a stake in the estate, including creditors, can file probate.  If the cost or the estate's equity is so low, Tx Estates Code allows the representative of the estate to disclaim the property, clearing the way for the creditor the foreclose.  Order granting disclaimer acts as notice of default (first half of the foreclosure).  Creditor still files NoF per property code and conducts trustee's sale.  Conducted a foreclosure exactly like this just this month (July).

    Keep in mind, Texas' non-judicial foreclosure is a privilege, not a right.  If the NJF is impossible or questionable to accurately complete, the default is a judicial foreclosure, which is what this part of the probate code allows.  And when dealing with an estate, the probate court has exclusive jurisdiction, not regular district court.

    Texas does not have a state inheritance tax (or state income tax).

  • Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    6y

    For one of our TX HELOCs, we had to bounce back and forth between the probate judge and the regular one that was handling the HELOC. The probate judge had the final say.

    The other TX HELOC was hung up at the end because the contsable had to conduct the sale and they were not easy to deal with. The seemingly simplest tasks took months to do. We inherited the judgment from when we bought the loan so we had no choice but to go that route.

    Today, we learned that the constable wants to charge us $7200 for conducting the sale! On an asset with a property value of $187k and opening/reserve bid of $150k. Our attorney said that he always gets foreclosure judgments that allow non-judicial sales.

    @Terrence Evans @Jerel Ehlert

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    6y
  • Flipper/Rehabber · Manheim PA · Member since 2019 · 9 posts · 3 votes
    6y

    @Steve Babiak yes!!! Thank you! I found this thread soon after my post. I was not searching specifically enough. All of you provided so much helpful information. Somehow, my posted question became severely diverted to TX matters, lol! 

    I’m still working through all the phone calls and due diligence. I’m not finding many answers. Everything is twice as difficult with the Dept of Revenue only accepting email right now and many still not in the office. 

    Anyway, thank you for the direction. I read every word. 

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    6y

    Option 6 - contact the attorney handling the foreclosure and inform them; see if they will open a decedent file at the Register of Wills. That would be necessary to do at some point if no bidders open their mouths at the sheriff sale.

    And if the inheritance tax is supposed to have priority over the mortgage, which is the case according to the PA Department of Revenue and the letter that @Chris K. supplied in that other thread, then the sheriff's distribution can be challenged on that basis if the inheritance tax is not paid out of the proceeds of the sheriff sale before the foreclosing lender gets a distribution.

  • Investor · Pittsburgh, PA · Member since 2015 · 1k+ posts · 1k+ votes
    6y

    @Renee K. I buy a lot of properties at sheriffs sale. Very dangerous and due diligence is huge. I would seek out one of the attorneys that represent a lot of banks and taxing bodies at the sheriffs sale. Hire them to consult with. I buy at the Pittsburgh Allegheny county sale and sometimes Beaver and Washington county. All counties are a little different so its best to get this knowledge straight from someone who is in the know for the area specific.

  • Title Representative · Cherry Hill, NJ · Member since 2015 · 48 posts · 31 votes
    6y

    @Steve Babiak

    Generally speaking, only liens that are divested by the sale are entitled to proceeds in distribution. Since the State is taking the position that the inheritance tax lien survives the sale it should not be paid through distribution. The attorney for the mortgagee will likely fight against having it paid out of the proceeds. It could go either way, but I wouldn’t rely on that as a solution. There is also the issue of how much would the sheriff pay to the department of revenue if no one has filed a tax return.

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    6y

    @Greg Wilkins - then why are property taxes paid out of sheriff sale proceeds? Property taxes don't divest in PA mortgage foreclosures at sheriff sales.

  • Flipper/Rehabber · Manheim PA · Member since 2019 · 9 posts · 3 votes
    6y

    @Steve Babiak My first property was a sheriff's sale and I took possession at the end of September. Disbursements were completed, but I did not receive a copy of them. In February of the following year, I received an overdue property tax bill. (3000!) Since the bill was not technically "due" (the bills are sent out in July, but you can make installments until December) at the time of my purchase, it was not distributed. The sheriff's office wiped their hands of it and said it was all on me. 

    I thought it was a bunch of BS since it was a technicality that they obviously knew about and I didn't. But I guess even if I had known, I still would have had to pay it. Minus the penalties, of course. Anyway, lesson learned. Ask for a disbursement sheet and assume property taxes will not be paid. At least in my neck of the woods here in Lancaster County, PA.

  • Flipper/Rehabber · Manheim PA · Member since 2019 · 9 posts · 3 votes
    6y

    @Greg Wilkins @Steve Babiak I am 100% sure that the responsibility for the inheritance tax will be on me which is why I am trying to find out the worst case scenario. If I can somehow arrive at an estimate, I can build it into my investment and figure out if I can still come out ahead. As I stated in the original post, there are many variables and no one seems to be able to nail down the exact procedure. Probably because there really isn't a "procedure" due to the limited understanding and diversity of how title companies/individuals with the company could choose to handle it. 

  • Attorney · Austin, TX · Member since 2014 · 888 posts · 759 votes
    6y
    Originally posted by @Andy Mirza:

    For one of our TX HELOCs, we had to bounce back and forth between the probate judge and the regular one that was handling the HELOC. The probate judge had the final say.

    The other TX HELOC was hung up at the end because the contsable had to conduct the sale and they were not easy to deal with. The seemingly simplest tasks took months to do. We inherited the judgment from when we bought the loan so we had no choice but to go that route.

    Today, we learned that the constable wants to charge us $7200 for conducting the sale! On an asset with a property value of $187k and opening/reserve bid of $150k. Our attorney said that he always gets foreclosure judgments that allow non-judicial sales.

    @Terrence Evans @Jerel Ehlert

    $7200??? Wow. That's ridiculous. 

    Yeah, I'd request a modification to allow your trustee to conduct the sale. FHA standard fees are $1400-1800. I charge $1600. Even the fees I see on tax foreclosures are in the $1-3K range. Sounds like that constables office was trying to gouge you because they didn't want to do the work (or there's a ton of heirs to serve). Or their fee is inclusive of court costs and ad litem, not just for them to conduct the auction.

  • Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    6y

    @Renee K. Sorry for partially hijacking your post! Glad to see that you got the feedback you needed. One last comment on TX, if you don't mind :)

    @Jerel Ehlert FYI: The $7200 commission was for Fort Bend county. Our attorney is trying to get the commission down but we'll see. The Constable's office was slow to do anything and oftentimes didn't seem to know what they were doing.

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    6y
    Originally posted by @Renee K.:

    @Greg Wilkins @Steve Babiak I am 100% sure that the responsibility for the inheritance tax will be on me which is why I am trying to find out the worst case scenario. If I can somehow arrive at an estimate, I can build it into my investment and figure out if I can still come out ahead. As I stated in the original post, there are many variables and no one seems to be able to nail down the exact procedure. Probably because there really isn't a "procedure" due to the limited understanding and diversity of how title companies/individuals with the company could choose to handle it. 

     Case 2 that you outlined in your initial post is the worst case for you if you buy.

    I contacted a friend who went through this with a sheriff sale purchase a couple of years ago. What he told me was more like your case 3 situation, where the debt is subtracted from the property value and then the tax is computed on that remainder if it is a positive value. He also told me he had to hire an appraiser to set the date of death value for the property, and that was the value from which the debt was subtracted.

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