5 Things to Consider When Inheriting Your Parents' House​​

Updated: Nov 12, 2021

​Four bedrooms, two bathrooms, and endless memories. While this may not be the exact layout of your parents’ house, whatever it may be, an inherited home can be both a significant asset and an emotional rollercoaster. Here are five things to consider when inheriting a house; thinking through these topics now may save you and other family members from unnecessary stress down the road.

1. Avoid Probate if Possible

If you haven’t already inherited your parents’ home, now is the perfect time to open a dialogue with them about their estate plan. While conversations about finances and end-of-life planning have the potential to be difficult and uncomfortable, they don’t have to be.


One approach is to chip away at the conversation little by little. The family home can be the most significant asset within an estate, so it should be given special attention.

At a minimum, it’s a good idea to ensure your parents’ home is not subject to a full probate court proceeding. This type of probate process entails the court supervising the distribution of assets, including the family home. In California, if an estate's value exceeds $166,250, it triggers a full probate process.

According to Zillow, the average home value in California is $708,936. As you can see, most homes in California would easily trigger the full probate process. However, if your parents’ home is in a trust, the home's value is not counted toward the $166,250 threshold.


Accordingly, a simple conversation with your parents to confirm that their home is in a trust can give you peace of mind that the home can avoid probate. On the flip side, if you inherit the home and it is subject to probate, that process can take a minimum of nine months to complete.[1]

2. Get Details on Your Parents’ Mortgage

Knowing the amount of money your parents owe on the home is critical in determining how best to proceed. In the ideal scenario, your parents have completely paid off the home and you will inherit it debt-free.


However, if your parents still owe money on the home, it’s a good idea to know how much their monthly mortgage payments are ahead of time so you understand how much of a financial burden the house could become.

Depending on the other assets you inherit (such as life insurance, retirement accounts, etc.) and your own financial situation, you may be able to pay off the remaining mortgage. However, if that is not a possibility, you may be faced with deciding whether you need to sell the home or maybe even live in the house as your primary residence.


Given that real estate is so expensive to acquire, keeping the home in the family is often an attractive goal. However, doing so is more easily achieved if you can start the conversation early, become familiar with the details of your parents’ situation, and begin planning now.

3. Keep a Level Head When Coordinating with Siblings

If you inherit the home alongside a sibling (or multiple siblings), there will undoubtedly be differing viewpoints on what to do with the home. These differences are often driven by siblings being at varying stages of life and having different financial needs. The family home usually has substantial financial and emotional significance (which could be positive and negative), and discussing its disposition can often be heated.


While discussing the home with siblings, it’s important to approach it with a mindset geared toward compromise. No single solution will be 100% satisfactory to each sibling. However, clearly communicating your needs and the rationale behind them can go a long way in maintaining civility.

One approach that can get siblings on the same page is framing the narrative in terms of your parents’ grandchildren. Shifting the focus from you/your brother/your sister to your kids/your nieces/your nephews can help illuminate what the real needs are and create unity in caring for the next generation.


Deciding what to do with the inherited property is largely a financial decision; so bringing as much rationality to the table as possible is in everyone’s best interest.




4. If You Rent Out the House, Prepare to Be a Landlord

When people inherit real estate, one of the common thoughts is, “Let’s rent it out and generate passive income.”


Generally, if you can rent out the house in a cost-effective manner in terms of your time and your money, it can be a real financial win. As you hold onto the property, history tells us that the value should most likely increase; and while you hold it, consistent passive income can make your life a little easier. That said, being a landlord isn’t for everyone.

Managing the property for a renter can be extremely time consuming. A renter’s issues become your issues. When the toilet breaks, there’s a leak in the ceiling, the AC stops working, or the kitchen drain has even a simple clog, these can all become your responsibility. And if you don’t take swift action to address these issues, you can open yourself up to lawsuits, delayed and withheld rental payments, and damaged property.

Before deciding to rent out the property, make sure you know the decision comes with potential pitfalls. If you do decide to rent out the property, you should have a system for interviewing and securing quality tenants; and you should consider using a property management company.


Although a property manager will charge a fee (typically a set percentage of the monthly rent), having one can significantly reduce the stress on you. This can be an especially useful option if you live a great distance from the inherited home.

5. If You Sell the House, Don’t Forget This Tax Benefit

If you do decide to sell the property, you will likely be responsible for paying capital gains taxes on the sale. You must pay capital gains tax to the IRS on the profit you make from the sale; which is calculated by the sales price minus your “basis.”[2]


In simple terms, the basis is similar to what you “paid” for the house. Since you inherited the home and didn’t really “pay” for it, your basis is the fair market value of the home at the time your last remaining parent passed away.

As an example, imagine your parents bought the home for $200,000 in the 1970s, you inherited it in 2020 when the fair market value was $700,000, and then you eventually sell the home for $800,000 in 2022.


Your basis is $700,000 and the profit on which capital gains would be due is only $100,000 (instead of $600,000 in profit if you had to use the $200,000 price that your parents paid as your basis).


This step-up in basis can be a bright spot in what can otherwise be a rather costly tax bill.

Final Thoughts

When inheriting your parents’ home, you have many factors to consider. Remember: Everyone’s situation is unique. Your decision-making process should include a thorough evaluation of both short-term and long-term goals.


Schedule a meeting with us and we’d be happy to discuss how the family home can be an integral part of your legacy planning. Whether you’re the potential recipient of the home or the parent who will be gifting the home, it’s important to have an open dialogue and a comprehensive plan in place.


Schedule a complimentary meeting to discuss your legacy plan today.


 

Disclosures: This information should not be construed as investment, tax, or legal advice.


[1] The Judicial Branch of California. “Wills, Estates, and Probate.” Wills, Estates, and Probate - probate_selfhelp. Accessed September 26, 2021. https://www.courts.ca.gov/8865.htm?rdeLocaleAttr=en.

[2] Internal Revenue Service. “Gifts & Inheritances.” Internal Revenue Service. Accessed September 26, 2021. https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritances.

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