So you inherited a home or will be, are you prepared for what’s next?
Not all surprises are created equal, especially when it comes to inheriting a house. Yep, you heard it right. So buckle up, because today we’re diving into the wild ride that is – drum roll, please – Inherited Real Estate!
Before you start envisioning moving into your newly inherited home, renting it out, or selling it, let’s help provide you with some information.
Now before we dive in, we just want to remind you that we are Real Estate sales professionals. We encourage you to speak with your Estate Planning Attorney and/or CPA for all current laws and information.
The big question is: “Who’s paying the mortgage?” Because, let’s face it, those payments don’t just vanish into thin air. Spoiler alert: the bank doesn’t consider inheritance a ‘get-out-of-jail-free’ card. In most cases, whoever inherits the property is responsible for the mortgage on it.
Let’s talk about one of our newer friends Prop 19, which decided to join the inheritance party in California. Prop 19 changes how property taxes are handled for inherited homes. Previously, parents could pass down homes to their kids without any property tax reassessment, which was like passing down Grandma’s secret sauce recipe. Now, unless the heir lives in the home as their primary residence and the home’s market value doesn’t exceed the assessed value by more than $1 million, say hello to a tax reassessment.
And if you think inheriting a house held in a trust is easy peasy, think again! If the trust has been set up correctly, the house can be transferred without going through the probate process, which is nice, right? Yes, however, the trust doesn’t have a magic wand to make the mortgage disappear. If there is a mortgage on the property and you’re the lucky beneficiary, you’ll be taking on those payments. Trust me on that! (Pun fully intended, of course).
Now, let’s move on to the million-dollar question – literally. “Will I owe capital gains tax on this inherited property?” The short answer is: maybe. The IRS uses a method called ‘step-up basis’ when calculating capital gains tax on inherited property. This method adjusts the value of the property to its market value at the time of the benefactor’s death. So, if you sell the house for more than its ‘step-up’ value, you could be on the hook for capital gains tax. However, capital gains taxes are based on the difference between the cost of an asset and its selling price, which could potentially eliminate capital gains taxes on homes that are sold immediately after death.
Can you sell the house to pay off the mortgage? Absolutely, provided the home is worth more than the balance remaining on the mortgage. Many heirs go with this route if there are multiple family members involved, or because it’s easier to liquidate this asset into cash.
So, before you rush into making plans for your inheritance, gather all of your options, and remember to consult with seasoned professionals such as Estate Planning Attorneys, CPAs, and Real Estate professionals for the most current and accurate information on inherited properties in California.
