Real property is the most common and valuable asset protected within an estate, especially in California. Generational property retention, and thus the passing of property between heirs, is how familial wealth is commonly established and preserved today. While it is undoubtedly a significant privilege to receive a home as an inheritance, it can also be a complicated and intricate process, as there are many ways for heirs to obtain ownership of a home through inheritance and multiple legal obligations that can be inherited with a house. This blog post explores the situations and difficulties that may arise with property as an inheritable asset.
If a home is given to one person, once the property is transferred to them, they have complete discretion over any choice of the house, whether it is selling, renting, keeping, or leasing the property. However, prior to making that decision, it is vital to know the financial status of the home, specifically whether there is a mortgage on the home or not. If the home still has a remaining mortgage, it is imperative to inquire into the details of that loan as an heir may assume the existing loan and have to maintain payments, or there could be a due-on-sale clause, which would require the mortgage to be paid in full upon transfer (there are exceptions for spouses or relatives who occupy the home)
When assets are transferred through a Will, or if a person passes intestate, all assets must go through probate before being distributed to the rightful heirs. In probate, all debts must be resolved before disbursement, and thus, if there are insufficient funds within the estate to pay the mortgage, it could result in the sale of the estate property to clear the loans. In those situations, the administrator of the estate may have the sole discretion to make that call, independent of the wishes of the beneficiaries. In rare cases, the heirs or beneficiaries may be able to assume the mortgage of property that is in probate and continue making payments on it. However, this will depend on the mortgage terms and the lender’s policies.
- Renting, Selling, or Keeping the House
The most common issue that gives rise to many inheritance disputes is how the property will be handled after it is passed to heirs, specifically if there are no explicit provisions detailed within the estate document. When a home is given to one individual, all property decisions are within their exclusive control. However, if a property is distributed equally between multiple heirs, there will need to be a unified consensus on how the property will be handled
Renting out an inherited home can be a solid option if an heir(s) has no intention to ever live in the home, but is looking to generate passive income from the property. However, renting does come with new obligations, as the heir(s) would assume the role of a landlord for the property. Becoming a landlord comes with its own set of responsibilities, such as finding tenants, maintaining the property, and handling any repairs that may arise. Additionally, heirs must consider the tax implications of rental income and consult with a tax professional.
Income generated from rental property is typically taxed at a lower rate than income from salary or wages. Furthermore, administering rental property classifies as a business, which qualifies an heir for tax write-offs for insurance, repairs, property taxes, legal and professional fees, and maintenance
If an heir decides to rent the property, doing research regarding the local rental market and setting a fair rental price is crucial, as well as familiarizing themself with tenant laws. A clear lease agreement in place to protect the heir and the property is also necessary.
Selling an inherited home can be a good option if one does not want the responsibility of maintaining the property or if someone wants to collect money from the sale for other obligations or their own enjoyment. However, selling a home can be an emotional decision, especially if it holds sentimental value; this is often the root cause of inheritance disputes when multiple heirs are entitled to the property. It is important to weigh the pros and cons of selling and consult a real estate agent or financial advisor to determine the best course of action.
If it is decided that a home will be put up for sale, all legal responsibilities must be met and handled prior to sale, which includes: property taxes, liens, homeowner’s insurance, utilities, and bills. If there is a mortgage, it needs to be assessed before the sale to see if a reasonable profit can be made.
An heir will also need to have it formally appraised and hire a real estate agent to help list and market the home. Keep in mind that selling a home can take time, especially if the market is slow.
Keeping the Home
Keeping an inherited home can be the best option if there are sentimental ties to the property or if heirs want to reside within the home as their permanent residence or vacation property. Similar to the other options, keeping a home also comes with its own set of responsibilities, such as property taxes, insurance, and maintenance.
If heirs decide to keep the property, it is important to have a plan in place for how the home will be used and maintained (especially if the property will be shared with multiple heirs). Heirs may also want to consider hiring a property management company if they do not live nearby or if they do not have the time or resources to manage the property themself.
Overall, inheriting a home and deciding what to do with an inherited home can be a difficult decision. It is important to consider your personal circumstances, financial goals, and the emotional implications of each option to allow for a seamless process in the transfer of assets. While the process can be difficult, with careful planning and guidance from a knowledgeable attorney, it is possible to navigate these challenges and successfully inherit a home.