Inheriting a home from a family member is typically a bittersweet event—taking possession of a home that has sentimental memories in large part because of its association with the loved one who has passed. After time has passed and semblance of normality has reasserted itself, it is finally possible to consider what to do with the property.
Many people choose to convert these newly acquired second homes into rentals, while others sell it on the open market. Much of what determines the value of inherited properties, and what the inheritors can do with it, comes down to the condition of the home.
But there are other factors to consider, including the will of the previous owner, the probate codes in your state, and the funds available to the new owner(s). If there are multiple inheritors, things are complicated further, because if everyone in the estate doesn’t agree about what to do, a buyout of the property is necessary.
California’s probate laws can greatly limit what you can do with an inherited home, particularly if you intend to sell it.
Probate laws differ from state to state, but they all play a role in what can be done with inherited property throughout the probate process. In some states, probate laws allow you to make modifications and improvements to inherited properties, which can help facilitate a sale or conversion into a rental.
But other states are far stricter. California’s probate code often requires executors and inheritors to exercise caution when making repairs and improvements. The law recognizes that protecting the value of a property in probate may require the use of an estate’s cash assets to perform repairs. But you will need to work closely with the executor of the estate, as the responsibility falls to them to ensure that such actions are implemented appropriately. It may be wise to consult with a probate attorney.
California’s probate code can also prove to be a challenge if multiple stakeholders are involved. Multiple family members can qualify as being eligible to serve as the executor of a will under the state code, but only one can actually do so. It may be tempting for your family to get entrenched in disagreements over who to choose, which can lead to conflicts about what to do with the inherited property. But by keeping your goals in mind, you’ll be better able to accelerate the process of disposing of an inherited property.
If you’re not the sole inheritor of a property, you’ll have to buy out the other stakeholders if you have plans that don’t include them.
Many people who inherit property from loved ones often share this inheritance with siblings or other family members, but they may not all agree on what the next course of action should be with the home. In a perfect world, everyone would agree to just share the profits from selling or renting out the house, but that isn’t always the case.
Someone who wants to keep the home when others would prefer to sell it may try to record a promissory note. This note details how they will be able to pay month-to-month installments to buy out the remaining shares of the home.
For people who are looking to sell the property or convert it into a rental in the face of opposition, a more direct buyout is required. At Socotra Capital, we provide loans to facilitate buyouts and make rental property improvements. It’s one of the fastest ways to financially resolve disagreements on what to do with an inherited property, and allows you to get started that much sooner on any desperately needed improvements.
However, if none of these options are agreeable to the other parties, you might need to consider getting a real estate attorney to file a lawsuit for partition. This is the last ditch and often most unfavorable option, because it can cost you a lot in legal fees, which can easily wipe out whatever profits you were standing to make from selling or renting out the property. And that’s not even considering the money you may need to spend on the deferred maintenance.
Many consider inherited properties as potential rentals, but it can take a lot of time and money to make the conversion.
Converting inherited properties into rentals is very enticing for people who do not want to live in a newly inherited house, but don’t want to sell it either. But there’s more involved than just signing your property up for Airbnb or putting an ad on Craigslist. You need to have legal proof of ownership, and have clear title to the home. Obtaining a deed and title saves a lot of legal hassle in the long run, and the process of obtaining a title also allows you to see if there are any outstanding liens on the property.
You also want to hire a home inspector to check out the property. Unless the home is essentially brand new, they are likely going to find more than a few issues to be addressed, and it can be expensive to address everything up front.
Fortunately, you can name the various home improvements, repairs, general maintenance of a rental, and even the money spent on advertising vacancy, as tax write-offs. But the ultimate cost of addressing deferred maintenance can be high on older homes, particularly if the issue involves HVAC, plumbing, or electrical systems. And some damage can ‘sneak up’ on a seemingly clean house, like mold or water damage from leaks.
You might be able to get away with cheaper repair work on a vacation rental. But for long-term rentals, or even the sale of an inherited property, a home inspector will likely discover where corners were cut or neglected altogether. Depending on the problem, it can cost you even more money to undo shoddy work and follow it up with proper repairs.
Plan for capital gains taxes and real estate tax reassessments on inherited properties.
If your goal is to sell or rent the inherited property, you will have to pay capital gains taxes on the profits. You can avoid this by reinvesting your profits into another rental property, or by offsetting capital gains with capital losses.
For Californians worried that inheriting a parent’s property will trigger a reassessment of the home’s value—and corresponding increase in property taxes—you’ll be relieved to know there’s a loophole. While it’s well known that the annual maximum 2% increase in valuation doesn’t apply once a home is sold, what isn’t as widely known is that when a residence is passed from parent to child, the property is not reassessed.
In addition, if you have inherited a second home or other property, the exclusion allows for a reassessment exemption on property totaling up to $1 million in assessed value.
If you have inherited a rental property you intend to keep, you should decide whether you will act as landlord or hire a management company.
Inheriting an occupied rental property comes with some additional obstacles, and you will need to honor existing leases with tenants. You’ll also need to continue providing maintenance the property needs, advertise vacancies, screen new tenants, accept payments and deposits, and more.
Not everyone is ready or willing to take on this level of responsibility. Most real estate investors work with a property management company that can manage the small things while they receive passive income. But this can affect whether you are able to claim expenses against your income.
Inherited properties can end up being your new home, or can be sold or converted into a rental to provide much-needed financial stability. As a hard money lender, Socotra Capital can provide the cash you need to buy out the property from other inheritors, and also help fund the critical home improvements needed to attract offers. Contact us today to learn more about how we can help you!