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.

Inheritance Tax on a foreclosure

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