Inheriting a home in California can be both a valuable asset and a complex legal process. Whether you plan to live in the home, sell it, or rent it out, understanding the financial, tax, and legal implications is essential. This guide will walk you through everything you need to know about inheriting real estate in California.
Comprehensive Guide to Inheriting Homes
1. Understanding Probate and Trusts
The way a home is inherited depends largely on how it was owned and whether it was placed in a trust.
A. Probate Process
If the deceased person owned the home solely in their name and did not have a living trust, the property must go through probate.
Probate can take 6 months to 2 years and involves court oversight to distribute assets.
If the estate is worth less than $184,500 (as of 2024), a simplified probate process may be available.
B. Trusts Avoid Probate
If the home was placed in a revocable living trust, it bypasses probate.
The successor trustee can transfer ownership to beneficiaries immediately or according to the trust’s terms.
2. Property Taxes: Proposition 19 Impact
California’s Proposition 19, which took effect in 2021, changed how property taxes work for inherited homes.
Before Prop 19: Children inheriting a primary residence could keep the low property tax assessment without restrictions.
After Prop 19: To maintain the existing tax rate, the heir must use the home as their primary residence.
If the home is converted to a rental or sold, the property will be reassessed at its current market value, leading to potentially higher property taxes.
3. Capital Gains Taxes and the Step-Up in Basis
Inheriting a home in California comes with a step-up in basis, which reduces capital gains taxes if you sell the property.
Step-Up in Basis Explained:
The home's cost basis is adjusted to its fair market value at the date of the owner’s death.
If the inherited home is sold soon after, there may be minimal capital gains taxes.
If the property is held for years and appreciates, capital gains tax will apply to the difference between the new sale price and the stepped-up basis.
4. Options for Heirs: Sell, Rent, or Keep
A. Selling the Home
If you decide to sell, work with a real estate agent to determine the home’s market value.
Factor in capital gains tax and potential closing costs.
B. Renting Out the Property
If keeping the home as an investment, consider property management responsibilities, rental income potential, and property tax implications.
The home’s property taxes may be reassessed at market value if not used as a primary residence.
C. Keeping and Living in the Home
If you plan to live in the home, transfer the title into your name and update homeowners insurance.
Confirm eligibility for property tax exclusions under Proposition 19.
5. Handling Mortgage and Debt
If the home has an existing mortgage, the lender must be notified of the owner’s passing.
Heirs typically have the right to assume the mortgage under federal law.
Reverse mortgages must often be repaid immediately upon the homeowner’s death.
6. Legal Considerations and Next Steps
Title Transfer: File a Change of Ownership with the county recorder’s office.
Affidavit of Death: If the property was owned in joint tenancy, a simple affidavit of death and death certificate can transfer ownership.
Estate Planning for the Future: If you inherit a home, consider placing it in a trust to make future inheritance smoother.
Final Thoughts
Inheriting a home in California comes with unique legal, tax, and financial considerations. Whether you plan to keep, sell, or rent the property, understanding probate laws, Proposition 19, and tax implications will help you make informed decisions. Consulting with an estate attorney and financial advisor can provide valuable guidance to navigate the inheritance process efficiently and effectively.
Contact the top-rated California trust and probate attorneys Moravec, Varga & Mooney today to schedule a telephonic consultation. Have questions, call (626) 460-1763 or email LV@MoravecsLaw.com.
Southern California Probate Lawyer Serving all counties in California, including Los Angeles, Riverside, San Bernardino, Sacramento, Santa Cruz & Beyond.
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