Temecula and Murrieta Estate Planning Attorneys want to make you aware of important considerations when inheriting real estate. Inheriting real estate from your parents is either a blessing or a burden — or a little bit of both. Figuring out what to do with the property can be overwhelming, so it is important to carefully think through all your choices.
There are three main options when you inherit real estate: move in, sell, or rent. Which one you choose will depend on your current living situation, whether you have siblings, your finances, whether the house has a mortgage or liens, and the physical condition of the house. The following are some things to consider:
Taxes. In most situations, you do not have to pay taxes on property you inherit, but if you sell the property, you will be subject to capital gains tax. The good news is that inherited property receives a step-up in basis. This means that if you inherit a house that was purchased years ago for $150,000 and it is now worth $350,000, you will receive a step up from the original cost basis from $150,000 to $350,000.
You should get a post-death appraisal done as soon as possible to find out how much the house is currently worth. If you sell the property right away, you should not owe any capital gains taxes. If you hold on to the property and sell it for $400,000 in a few years, you will owe capital gains on $50,000 (the difference between the sale value and the stepped-up basis).
On the other hand, if you use the property as your primary residence for at least two years and then sell the property, you may be able to exclude up to $250,000 ($500,000 for a couple) of capital gains from your taxes.
Mortgage. Does the house have a mortgage on it – either a regular mortgage or a reverse mortgage? Sometimes it is specified in the estate plan that the estate will pay off the mortgage. In cases where it does not, with a regular mortgage, you will have to assume the monthly payments. There are some mortgages, however, that require the heirs to pay off the mortgage immediately. With a reverse mortgage, you usually have a limited time to pay off the mortgage in full.
Repairs. It is a good idea to hire a home inspector to assess the condition of the house. If the property needs significant repairs, it may affect what you do with it. Renovations and repairs can be costly and time-consuming. You may want to consult with a realtor before taking on any big projects. It may not make sense to spend a lot of money on the house.
Property Maintenance. Once you inherit the property, you will be responsible for maintaining it. The first thing you want to do if you inherit property is making sure the utilities and homeowners’ insurance are transferred to the new owners and continue to be paid on time. You will also need to pay all the property taxes and any other fees associated with the property.
Other Owners. If you inherited the property with siblings, you will all need to agree on what to do with the property. If one sibling wants the property, he or she can buy it from the other siblings. You may be wise to add a “Right of First Refusal” section to your trust. Otherwise, you can sell or rent the property and split the profits. If there is a dispute among siblings, you can try professional mediation.
Proposition–19. Proposition 19 has severe financial consequences for children inheriting property from their parents. Prop. 19 marked a landmark change to Prop. 13, the 1978 law that aimed to limit property taxes.
Children who inherit real property from their parents will have to factor increased property taxes in the decision to keep or sell the property. If a child chooses to keep the real property and use it as the child’s primary residence, then up to $1 million of the reassessed value will be excluded from the new property-tax basis.
If a family home is gifted or is inherited by two children, do both children have to reside in the family home as their primary residence to receive the parent-child exclusion under Proposition 19?
Both children do not need to reside in the residence to be eligible to receive the parent-child transfer exclusion.
As mentioned, at Copenbarger and Copenbarger we can provide options in your trust that will give the option to the children to purchase the residence. It is called the “Right of First Refusal.”
Ultimately, there are many decisions to make when you inherit real estate and deciding what to do with it can be a very emotional decision. If possible, try not to rush into any decisions until you have had time to thoroughly consider your options.
For assistance, speak to our Temecula and Murrieta elder law or estate planning attorneys. To schedule an appointment at our Temecula office or one of our other offices located throughout the state of California, contact us at (800) 244-8814