Tips for Inheriting Real Estate

While it might seem like a great opportunity, it’s important to understand that inheriting real estate also comes with financial and legal decisions. Knowing what steps to take can make the process smoother and help you make the right choices for your future.

Understanding Inheritance and Property Taxes

One of the first things to think about when inheriting a house is how taxes might affect you. Fortunately, there’s a tax rule called the "step-up in basis" that can help. This rule allows the value of the property to be updated to what it's worth at the time of the person’s death, not what it was worth when they originally bought it.

For example, if your parents bought the house for $100,000 but it's worth $300,000 when you inherit it, the new tax basis is $300,000. This can be important if you decide to sell the property because it could lower the amount of capital gains tax you might owe on any profit from the sale. Essentially, the tax is based on the difference between the value at the time of inheritance and the sale price, not the original purchase price.

Even with the step-up in basis, you might still have other taxes to consider. For example, if the estate is very large, it might be subject to estate taxes. Working with a tax advisor can help you understand how these rules apply to your situation, especially if you plan to sell the house or keep it.

Is There a CA Inheritance Tax

If you live in California, there’s good news: there is no state inheritance tax. This means you won’t owe any state tax on the property you inherit. However, federal estate tax rules still apply, but they only affect estates worth more than $12.92 million (as of 2024). So, unless the estate is over that amount, you won’t have to worry about federal estate taxes either.

That said, there are other taxes you may need to consider. For example, if you inherit a house and decide to sell it, you could owe capital gains tax based on the "step-up in basis" rule. This rule helps reduce the tax by using the property’s value at the time of inheritance instead of its original purchase price, but it’s still something to keep in mind if you’re selling the home.

Also, property taxes may change depending on local rules. In California, Proposition 19 affects how property taxes are handled when transferring property from parents to children. In many cases, this can lead to higher property taxes on an inherited home. Talking with a tax expert or estate attorney can help you figure out what your tax obligations might be and how best to handle them.

Legal and Financial Considerations

When you inherit a house, there are legal steps you’ll need to take to officially transfer the property into your name. This process usually involves probate, which is a legal procedure that ensures the deceased person’s assets are distributed according to their will. If there is no will, the property is distributed according to state laws. Probate can be complicated, and you might need legal help to make sure everything is done correctly.

Another important step is transferring the property title to reflect the new owner (you). You’ll need to file specific forms with the local government to officially take ownership. Without this step, you won’t be able to sell or make decisions about the property. You’ll also need to check if there are any debts or liens on the property, such as unpaid mortgages or property taxes, which must be settled before you can fully enjoy or transfer ownership of the home.

Managing or Selling the Property

After you’ve taken care of the legal and financial details, you’ll need to decide what to do with the property. There are two main options: keep the house or sell it. Each option comes with its own set of responsibilities and considerations.

Keeping the Property: If you decide to keep the house, remember that owning a home requires regular upkeep. You’ll need to manage repairs, keep up with property taxes and insurance, and make sure the house stays in good condition. This might include fixing things like leaky roofs, maintaining the yard, and paying for any necessary renovations to keep the home comfortable and safe.

Selling the Property: If you’d rather sell the house, you’ll need to get it appraised to determine its current market value. Hiring a real estate agent who specializes in selling inherited properties can be very helpful. They can guide you through the process, from setting a fair price to marketing the home and negotiating offers. A good real estate agent can make the selling process smoother and help you get the best value for the property.

Consulting Professionals for Your Inherited Property

Because inheriting a house can be complicated, it’s often a good idea to get help from professionals. Here are some key people who can assist you:

• Estate Planning Attorneys: They can guide you through the legal steps of inheriting property, such as navigating probate or making sure the property is transferred correctly. An attorney can also help you understand any debts or legal issues tied to the property.
• Financial Advisors: Inheriting a house can affect your finances, so it’s important to understand how it fits into your overall financial plan. A financial advisor can help you figure out how to manage the property, plan for taxes, and decide whether to sell, rent, or keep the house. They can also help with investment strategies and long-term planning.
• Real Estate Agents: If you’re thinking about selling the property, choosing a real estate agent with experience in inherited properties can help you prepare the house for sale. They can advise you on repairs, list the home, and negotiate with potential buyers to get the best deal.

Working with these professionals can save you time and stress while helping you make informed decisions that are best for your situation.

Next Steps: Sell, Rent, or Move In?

Deciding what to do with the inherited property depends on a few key factors, including your financial situation, emotional connection to the home, and the current real estate market. Let’s look at your options:

• Selling the Property: If the cost of maintaining the house is too high, selling it might be the best option. Before selling, work with a real estate expert to evaluate the local market and set a realistic price for the home. Selling a house can give you a lump sum of money that you can use for other things, but it’s important to be aware of any capital gains taxes you might owe.
• Renting the Property: Turning the home into a rental property can provide a steady stream of passive income, but it also comes with responsibilities. You’ll need to take care of repairs, collect rent, and handle tenants. Some people hire property management companies to handle these tasks, which can make things easier but also costs money.
• Moving In: Moving into the inherited home can be a great option if it meets your needs. It could save you the expense of buying a new house and keep the property in the family. However, you should consider whether the home’s location, size, and condition fit your lifestyle. Make sure it’s a good long-term choice before deciding to move in.

Managing Responsibilities and Planning for the Future

When inheriting a house, it’s important to carefully think through your decisions. Here are a few things to keep in mind:

• Evaluate the Financial Impact: Consider the costs of keeping, selling, or renting the house. Each option has its own financial pros and cons, so make sure you understand all the expenses involved.
• Plan for the Future: Think about how each decision fits with your long-term goals. Whether you’re keeping the property as part of your family’s legacy or selling it to help fund other plans, be sure your choice aligns with your financial and personal aspirations.
• Manage the Property Carefully: Whether you choose to keep the property or sell it, it’s important to stay on top of your responsibilities. This includes keeping the house well-maintained, paying taxes on time, and making sure any legal issues are handled properly.

By considering all your options and consulting with professionals, you can make the best decision for your situation. Inheriting a house can be both a blessing and a challenge, but with the right information and support, you can navigate the process successfully and make choices that benefit you in the long run.