FAQ - Inherited Properties & Life Transitions
What happens when I inherit a home in California?
When you inherit a home in California, you typically go through probate, unless home you are inheriting was in a trust, become responsible for debts and maintenance, and face significant property tax changes due to Proposition 19, which often triggers reassessment unless you move into the home within a year and claim an exclusion as your primary residence. Key steps involve securing the property, handling mortgage/liens, understanding the "stepped up basis" rules for capital gains tax, and deciding whether to sell, rent, or live in the home, all while navigating new tax rules. It is important for you to seek professional tax and legal advice when making decisions on what to do with inherited real estate.
How is an inherited home valued?
An inherited is reassessed for tax purposes at its fair market value at the date of death of the owner. This is referred to as the “stepped up basis”. This value can be determined by an appraiser or a qualified real estate professional. This allows for the cost basis of the home to be reset, which often reduces the capital gains tax if it is sold. However, it could allow a property tax reassessment under Prop 19. Read more about stepped up basis here.
Do I have to pay capital gains tax on an inherited home?
The first thing for you to do when you inherit a home is meet with a qualified tax or legal professional. After you meet with them you will discover that it is rare for you to pay capital gains on a home you inherit if you carefully follow the specific IRS rules related to your inherited home. Read more about how to reduce taxes on an inherited home.
How soon can you sell an inherited property in California?
The heirs of a property that is held in a trust can sell it in as little as 30 to 60 days. If the inherited property has to go through probate it could take 18 months or longer. The time it takes to sell an inherited property depends on several factors. A court supervised probate will take the longest.
What happens when multiple heirs inherit a home together in California?
There are many decisions that multiple heirs who inherit a home together must make. The structure is usually each heir has an equal share of the value of the home and ownership is “tenants in common." Here are examples of the decisions the heirs will need to make.
- In order to keep the lower property tax rate (Prop 19) that the parents enjoyed, at least one of the heirs must use the home as their primary residence. If it is not used as a primary residence the property will be reassessed at the current market value. If one of the heirs does use it as their primary residence they can’t be forced to immediately pay off the mortgage, however they must take over the mortgage payments.
- An option is to sell the property and divide the net proceeds between the heirs. This choice is the simplest for avoiding disputes.
- An option is for one of the heirs to buy out the others after the value of the property has been determined, typically with an appraiser.
- The property could be rented which would require the heirs to all agree with the expense sharing and who would manage the property - often a third party property management company.
- The heirs could just keep the property, but it would require an agreement regarding the equal payment of expenses, property taxes and property maintenance.
Should I sell or keep an inherited property?
Before you make a decision to keep the home or sell it, seek the advice of a qualified California real estate attorney. The answer to keeping it will depend on if you decide to live in the property as your primary residence. This will likely allow you to take advantage of the property tax benefits of Prop 19. Another reason to keep it is because it is an important property to your family as a legacy property. A third reason to keep it is because it has long-term investment potential, or because it will secure high rental income. There are three reasons why an inherited property is sold; there are multiple heirs and the proceeds need to be distributed to them; you don’t want hassle and costs of managing and maintaining the property; or, you can’t afford the higher property taxes. Read about inherited property here.
What professionals should I talk to first?
In terms of inheriting property, there are a few professionals you can contact to help you. You can contact an estate planner, probate attorney, tax advisor/CPA, or a financial advisor. Your dedicated real estate advisor will be able to assist you with the sale of the home as well.
What is a stepped-up basis and how does it work?
Stepped-up basis of home values occur when someone inherits a home after the death of the owner. The IRS often allows a reset of the home’s value at the time of the owner’s death. This essentially allows the home to be sold without paying the capital gains tax on the gained value over the many years it was owned. Read all about stepped-up basis here.