Introduction

Inheriting a property can be both a blessing and a challenge, especially when you haven’t planned on becoming a landlord. Whether it’s your childhood home or a multi-family building passed down by a parent or relative, the decision to sell or keep the property is pivotal. Real estate expert Gia Silva sheds light on the complexities and key considerations in this scenario, helping you make the move that best fits your life and financial goals.

Understanding the Step-Up Basis and Capital Gains

One of the first concepts to grasp when you inherit a property is the step-up basis. This means the property’s value for tax purposes is adjusted to the market value at the time of inheritance. If you choose to sell the property quickly, capital gains taxes may be minimal or even non-existent, making a swift sale financially attractive.

California’s Prop 19: The Game Changer

However, for Californians, Proposition 19 introduces a significant twist. If the inherited home is not your primary residence, the property tax will be reassessed based on the current market value—often resulting in a substantially higher tax bill. For example, if your parents bought the home in the 1980s and were paying a few thousand dollars annually in taxes, you could be facing a hefty increase.

If the property was a primary residence and you want to preserve the lower tax base, you must move in and make it your own primary residence within a year. Even then, only $1 million of value above the original tax base is exempt from reassessment; the remainder is taxed at today’s rate. These rules make selling a tempting option for many inheritors.

Should You Become a Landlord?

If you’re considering becoming a landlord, you must examine whether the rental income will cover the new, higher property taxes, insurance, maintenance, and management fees. A positive cash flow can make holding onto the property a powerful long-term wealth strategy, with benefits like mortgage paydown, property appreciation, and tax deductions. However, future sales come with depreciation recapture taxes, often resulting in a higher tax bill than an immediate sale.

Making the Right Choice

There’s no universal answer; the right move depends on your financial picture, lifestyle, and long-term goals. Consult with your CPA, financial advisor, attorney, and realtor to ensure you’re making the wisest decision for your situation. If you’re facing an inheritance, consider all angles—don’t rush, and seek expert guidance to make the most of your real estate inheritance journey.