Real estate and estate taxes / Can a house owned by a decedent be sold before an estate tax is paid?

Karin Price Mueller/The Star-Ledger writes:   Question: Can a house owned by a decedent be sold before an estate tax is paid?

Answer:  Estate issues can be very complicated, so we’re glad you asked the question.

When a New Jersey resident dies, New Jersey statutes provide that state inheritance and estate taxes act as a lien on all property. This includes real property owned by the decedent as of decedent’s date of death, and the liens stay for a period of 15 years unless otherwise paid sooner or secured by a bond, said Lawrence Joel, an estate planning attorney with Joel & Joel in Oradell.

The estate’s executor or administrator must obtain written consent for property transfer, commonly known as a tax waiver, from the Division of Taxation, Joel said.

"The Inheritance and Estate tax waiver establishes that the property is either not subject to tax or that the taxes on the property sought to be transferred have been paid," he said. "Typically, a tax waiver for real property is obtained by filing a complete Inheritance and Estate tax return and paying the taxes due or by filing an L-9 known as the Resident Decedent Affidavit Requesting Real Property Tax Waiver."

He said the L-9 affidavit essentially states that the estate is not subject to New Jersey inheritance or estate tax and can be used in limited situations where lineal descendants — such as children or grandchildren — are inheriting and the estate is valued under $675,000.

When estates are settled, real property is often the largest single asset of the estate, he said, and it’s quite common that the property is marketed soon after the death of the decedent.

Until a sale, the executor or administrator is responsible for safeguarding and upkeep of real property until the estate is settled or the property is sold, Joel said. This includes providing for the payment of the taxes, insurance, maintenance and more.

He said it’s common to need to sell the property in order to pay inheritance and estate taxes and other obligations.

He said it’s smart to get a certified appraisal on the property to establish the fair market value of the property as of date of death. This appraisal value is important for the purposes of tax reporting and setting a sale price for the property, he said. The executor or administrator should maximize the return on the property by selling it for the highest price, hopefully, at or exceeding the property’s appraised value.

"Often real property will go under contract prior the estate obtaining an inheritance and estate tax waiver," he said. "This may be as a result of a delay in filing, backlog on the review of the return by the Division of Taxation or the opportunity of a quick property sale."

If that occurs, Joel said, it is still possible for the estate to sell the property. In all likelihood, the buyer will require an escrow be held to assure that inheritance and estate taxes are paid when the final assessment is made by the Division of Taxation. The escrow may be up to one-and-one-half times the estimated taxes due, Joel said.

If the returns have already been filed and taxes paid, but waivers not yet received, the escrow should be much less if required at all.

"The property may be sold and is subject to the Inheritance and Estate Tax lien," Joel said. "This lien will remain as a cloud on the title to the real property until the lien is satisfied."