What To Do When You Inherit Property

Inheriting property can be a very daunting task. Especially when you are grieving for the loss of
a loved one. There are a lot of moving parts going on at once. It can feel very overwhelming and
you don’t know where to start. Recently I was on KTVU Mornings on 2 discussing what are the
steps we need to take when inheriting property.

Understand How the Property is Title

Understanding how the property is titled is the first step to the process. Here in California there
are 3 possible ways the property can be titled 1. Trust 2. Right to survivorship 3. Or the person
has their name.

If the property is in a trust. It is a very simple, straightforward process. The successor trustee
manages the affairs of the trust. It follows the rules on how it should be distributed. It avoids
property going through probate which is a long tedious, expensive process.

With Right to survivorship (joint tenancy to right to survivorship or community property with
right to survivorship) the survivor automatically assumes the property when the owner of the
property passes away. There is no probate process. The person automatically receives the
property. They would need to file an affidavit of death with the county.

If the property is title to just the owner of the property or even in a Will then the property will go
to probate courts. The probate court will determine who is beneficiary of the property.

Find Out if There is Mortgage on the Property

If they have a mortgage it doesn’t automatically mean that you have to pay off the mortgage or
get a new mortgage. You have the right to take over the mortgage that person had and continue
to make those payments. So, notify the mortgage and let them know. You will have to do some
paperwork to officially assume the mortgage. Which is fantastic if they got a loan at a low
interest rate during Covid-Era.

Now if they have a reverse mortgage you have 6 months to pay off the mortgage balance. If the
home is worth less than the mortgage balance you can surrender the home. There is no
recourse action to you or the estate.

Taxes

There are 2 different taxes you have to worry about: capital gains taxes and property taxes.
There are a couple things you can do to avoid them entirely.

For capital gains you need to do a day of death appraisal preferably within 6 months of the
death of your loved one. When we do a step-up in basis of whatever is the value of the time of
death of the person who receives the money tax free!!! Any gains that happen after the death
we will have to pay capital gains on.

Here is an example: someone's grandparents purchased a property for $100,000 and they
decided to sell it the day before they died for $1million dollars. That is a gain of $900,000 in
which they would have to pay capital gains on. But let's say we wait a day later and they pass
away then sell it. Then we would not have to pay any taxes on that $900,000 gain. Sweet!!!!

When it comes to property taxes the game changed when in 2021 Prop 19 was passed. When
a grandparent or parent passes away a child or grandchild can move into the home within one
year and get their parent/grandparent property taxes value. Up to $1,044,586 above what
parent/grandparent purchase home for. Anything above that amount will have the property tax
reassessed.
For example, let's say a grandparent purchases a home for $100,000. When they passed away
the property was worth $1.5million. The grandchild decides to move into the property. They will
pay the property of their grandparents for $1.1 million. While $355,414 will have the new
reassess property value.

A common question is do all of the children/grandchildren have to move into the home? No!!!
Just one of them is fine. Another question is what if we decide to rent the property? If you
decide to rent the property it will be reassessed at that time. It is important to do a real estate
analysis on if it actually makes sense to rent with updated property tax value.

Inheriting property is not just a real estate decision. It is a tax decision, a family decision, and
sometimes an emotional decision all at the same time.

Before you decide whether to keep, sell, rent, or move into the property, take a step back and
get organized. Find out how the property is titled, whether there is a mortgage or reverse
mortgage, what the tax consequences may be, and whether keeping the property actually fits
into your long-term financial plan.

The biggest mistake people make is moving too fast without understanding the rules. A decision
that feels simple today could create unnecessary taxes, family conflict, or cash flow problems
later.

If you recently inherited property, or you expect to inherit property in the future, this is the time to
have a real conversation with your financial advisor, tax professional, estate planning attorney,
and real estate professional. The goal is not just to receive the property. The goal is to make the
best decision for your family, your finances, and your quality of life.