Last updated on 09/04/2024
The single most valuable asset most people in California own is their home. Passing a house from one generation to the next is the standard basis for building wealth in our country. But there are multiple ways an individual may inherit a house, and several options exist for using this asset after inheriting a home in California.
This article discusses inheriting a house through a will, inheriting a house through a deed of trust, and inheriting a house through a trust. It also considers potential obligations and options, such as what happens if you inherit a house with a mortgage, inheriting a house that is paid off, paying taxes on an inherited house, selling an inherited house, and inheriting shared ownership of a house with siblings.
If your family home or another piece of real estate is supposed to be part of your inheritance, but someone is trying to keep you from it, the experienced trust and will inheritance lawyers of Albertson & Davidson, LLP, are ready to help. We are aggressive trial attorneys who focus solely on these types of complex cases. We stand. We fight. We win.
Contact us online for a free confidential consultation today.
What If I Decide to Keep the House?
If a house is willed to you alone or passed to your individual control through a trust, you have the absolute right to keep it as your own. You may live in it, sell it, or rent or lease it to others.
You should first determine whether there is a mortgage on the house. If there is, you’ll need to contact the loan servicer. Before they can tell you about the loan balance, you’ll need to provide a death certificate and verify that you have inherited the house.
Check with the loan provider or the executor of the estate to determine whether there is mortgage protection insurance, which pays out if the mortgage is not paid off at the time of death.
Otherwise, the home loan may be structured as:
- An assumable mortgage, which allows the new owner to assume the existing mortgage and make regular monthly payments. If necessary, you may be able to refinance an assumable mortgage.
- A due-on-sale clause, which requires the mortgage to be paid upon any transfer of ownership. The lender may put a due-on-sale clause in a mortgage agreement to prevent a homeowner from passing on a mortgage that has a below-market interest rate. However, if a spouse, child, or other relative inherits the home through a will or trust and then occupies the home, they cannot be forced to pay off the mortgage on demand. If the heir does not occupy the home, the title transfer can trigger the due-on-sale clause.
In California, a homeowner may establish a deed of trust instead of a mortgage. Under a deed of trust, the lender gives the borrower the money to buy the home in exchange for one or more promissory notes, while the trustee holds the legal title to the property until the loan is paid off. A deed of trust provides more security for the lender because it defines conditions (nonpayment, for example) that allow the trust to sell the property, take it back, or compel accelerated payment of the loan to protect their investment.
A deed of trust may have a due-on-sale clause, but it would be bound by exceptions for spouses or other relatives who occupy an inherited home. If you are such an heir in California and a trustee is trying to force you out of a home that is rightfully yours or to make accelerated payments, you should contact a trust and will inheritance lawyer at Albertson & Davidson, LLP.
Do I Have to Pay Any Taxes When Inheriting a House?
An inheritance tax is assessed when an individual inherits property from a residence of that state.
California does not impose an inheritance tax. However, a few other states do impose inheritance taxes. If you live in California and inherit a house from a resident of a state that imposes an inheritance tax, you could be liable for the tax.
Six states have an inheritance tax as of 2024:
- Iowa
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
Note that Iowa is gradually eliminating its inheritance tax, which was abolished in 2021. Despite the repeal, inheritors for deaths occurring between 2021 and 2024 may still be subject to a diminished inheritance tax.
Individual states’ inheritance tax rules may include exemptions for real estate valued at less than a specified amount. You should alert your accountant or tax advisor if you inherit a home in a state with an inheritance tax.
Regardless of the house’s location, you’ll also have to pay any applicable annual property taxes, which may be rolled into mortgage payments. Your mortgage interest could be deductible on your income taxes.
Also, keep in mind that if you sell a house you inherit, you may be liable for federal capital gains taxes on the income you earn from the sale. However, heirs may get a stepped-up basis, valuing the house as of the date of inheritance.
For the 2024 tax year, there is a $13.61 million per individual exemption for federal estate taxes, taxes the deceased’s estate would have to pay before distributing the estate’s assets to heirs, according to the IRS. If the total estate is worth $13.61 million or less, the tax would not be assessed. This exemption is indexed to inflation annually.
Debt Considerations When Inheriting a Home
When inheriting a home, it’s important to be aware of any debts that might be attached to the property. While many people focus on mortgages, the home could also be subject to liens or other debts the deceased owed. For example, creditors may place a lien on the property to recover unpaid debts, and this could complicate the transfer of ownership. If the estate doesn’t have sufficient funds to cover outstanding debts, selling the property may be necessary to resolve those liabilities. Consulting with an estate attorney can help you understand the debt landscape and navigate solutions that protect your inheritance.
Proposition 19 Exemptions for Inherited Homes
Proposition 19, passed in California, offers important tax exemptions for heirs, but these benefits are contingent on certain conditions. If you inherit a home and plan to live in it as your primary residence within one year of the transfer, you may qualify to retain the home’s lower property tax base. This can significantly reduce your annual property tax burden. However, the home must have been the deceased’s primary residence for at least a year prior to the transfer. If the property exceeds $1 million in value, a reassessment may still apply, though the exemption may mitigate the impact. Consulting with a tax advisor can help ensure you fully understand your eligibility for Proposition 19 benefits.
What If I Decide to Rent the House Out?
Renting out an inherited home you don’t intend to live in yourself is one way to make income from the asset. The passive income derived from rental properties is usually taxed at a lower rate than, for example, salary and wages.
Because administering rental property is a business, you will be entitled to tax deductions or write-offs for:
- Insurance
- Maintenance
- Repairs
- Property taxes
- Legal and professional fees
As a landlord, you will be responsible for the upkeep of the home and should become familiar with tenants’ rights in California. You could hire a property management firm and pay its (tax deductible) fees out of the income derived from renting the home out.
Should I Sell the Inherited House Instead?
Selling an inherited home allows you to take the money derived from the sale (minus taxes and fees) and use it to invest, pay debt, or enjoy as you see fit. It also frees you from the responsibility for managing and maintaining the house.
Before putting an inherited house up for sale, you must make sure it has cleared probate and that all obligations, like property taxes, liens, homeowner’s insurance, and utilities bills, have been met. You need to check what is owed on the mortgage to determine whether it can be sold at a reasonable profit.
There will be a cost to prep and sell the home, unless you do it yourself. Expect to pay 4 to 6 percent of the total sale price as a commission if a real estate agent helps sell the home.
If you use an inherited home as your main residence for at least two years of the five years prior to its date of sale, the IRS allows you to deduct up to $250,000 ($500,000 for married filing jointly) of the sales proceeds from your income.
Probate to Inherit a House with a Mortgage
A deceased person’s house must usually go through probate before ownership is passed to an heir. In probate, the deceased person’s debts must be settled before assets can be distributed to beneficiaries of the will. If there is not enough cash or other assets in the estate to pay debts, then the administrator of the estate may sell estate property to pay creditors.
In some cases, the administrator of the estate has the authority to decide that the house must be sold to pay creditors. Any cash that remains would be distributed to the individuals designated to receive the home in the will.
When all debts have been settled, the remaining assets should be distributed among the heirs according to the will. The designated beneficiaries may then take ownership of the home, even if there’s an outstanding balance on the mortgage.
An heir who takes ownership of the family home must decide whether to continue making payments on the loan or use other assets to pay the mortgage off. Even if the home is put up for sale, mortgage payments must be made until money from the sale is available to pay off the mortgage.
Probate vs. Non-Probate Transfers: Key Distinctions
Understanding whether a home transfer falls under probate or non-probate is critical in determining how the property is inherited. Probate is required when a home is solely owned by the deceased and not placed in a trust or joint tenancy. This court-supervised process can be lengthy and costly. On the other hand, non-probate transfers occur when the home is held in a trust, joint tenancy with right of survivorship, or another arrangement that bypasses the probate process entirely. For example, a trust can ensure the home transfers smoothly to the intended beneficiary without court involvement. The distinctions between these processes impact both the speed of the transfer and the cost, so it’s essential to understand your specific situation.
What If I’m Inheriting a House Along with Siblings?
Joint ownership of a home can become complex and lead to conflict. In most cases, it is less stressful in the long run for siblings to sell a home that is willed to them jointly and evenly divide the money from the sale. If you sell a home quickly enough after inheriting it, you may not incur capital gains tax because there will have been little change in the home’s value between your assumption of ownership and its sale.
A single sibling may want to buy the family home from the others or perhaps two siblings will buy it and live together. How payments are to be made (with a loan taken out against the property, over time with interest, for example) should be set forth in writing and notarized in a sales contract.
Joint ownership of real estate among several siblings is more feasible for a home that will not serve as a primary residence, such as a vacation home. Joint ownership requires a contract with rules for shared use. Siblings might also rent out a jointly owned piece of property with a contract spelling out how rental proceeds and managerial duties and costs will be shared.
Joint ownership of real property may be structured as:
- Tenancy in common – Each owner possesses an interest in the property, whether equal or unequal to others. Each owner has the right to sell or transfer their share in the property without their co-owner’s approval. If a co-owner dies, their interest passes to their heirs.
- Joint tenancy – Each owner possesses an equal interest in the property. Upon a co-owner’s death, their share passes to the surviving co-owners. Shares in the property can’t be sold without the consent of all co-owners. If an owner sells their share, the joint tenancy dissolves and becomes a tenancy in common.
About Prop 19 and Inherited Property in California
Proposition 19 limits property tax increases on family homes transferred from one generation to the next if the homes continue to be used as primary residences. Specifically, it permits transfers of a family home or family farm between parents and their children – or grandparents and their grandchildren – without a change in ownership for property tax purposes. This means rules limiting annual hikes in property taxes would continue to apply to the property.
But to qualify to keep the lower tax value, the parents must have lived in the home for at least a year prior to the transfer and at least one child must be the principal resident within one year after the transfer. For a transfer from grandparents to grandchild, the grandchild’s parents must be deceased, and the residency requirement applies.
If the home is worth more than $1 million, Prop 19 allows it to be partially or entirely reassessed, which would lead to a partial or complete loss of the Proposition 13 tax benefit.
Proposition 19 was hastily written to be put on the November 2020 ballot. It changed the state constitution but does not provide implementing statutes. Also, portions of its language changes are ambiguous, unclear, or conflicting. It is imperative that you speak to an accountant or a tax attorney before you rely on potential Proposition 19 tax savings.
Contact a California Trust and Will Inheritance Attorney
If you are concerned about the disposition of your family home after a loved one’s death, contact the experienced trust and will inheritance lawyers of Albertson & Davidson, LLP. Technicalities of the will, as well as property value and tax law, can complicate probate and transfer of home ownership to the rightful heirs. Having an experienced attorney help you mount a challenge if your inheritance is denied will be crucial to ensuring your success.
Founding attorneys Stewart Albertson and Keith Davidson at Albertson & Davidson, LLP, are trial lawyers who focus on inheritance litigation. We stand. We fight. We win. Our law firm has offices in Los Angeles, Carlsbad, Bay Area, and Irvine.
