Inheriting a House: Complete Guide to Your Options, Taxes, and Next Steps

Inheriting a house is both a significant financial event and an emotional milestone. While receiving property from a loved one can represent a meaningful legacy, it also comes with immediate decisions, potential tax consequences, and ongoing responsibilities that require careful consideration.

According to recent data, millennials are expected to inherit approximately $27 trillion from baby boomers and seniors by 2045, with real estate representing a substantial portion of this wealth transfer. Understanding your options and the implications of each choice is essential for making the right decision for your circumstances.

Immediate Steps After Inheriting a House

When you inherit a property, several urgent matters require your attention. Taking these steps early can prevent complications down the road and protect the value of your inheritance.

Your Three Main Options for an Inherited Property

Once you have addressed the immediate logistics, you will face a fundamental decision: what to do with the property. Each option has distinct financial implications, lifestyle considerations, and potential benefits.

Option 1: Selling the Inherited Property

Selling is often the most straightforward choice, particularly when multiple heirs are involved or when the property is located far from where you live. The primary advantages include immediate access to cash, elimination of ongoing expenses, and simplicity when dividing assets among beneficiaries.

When selling an inherited home, timing matters. The stepped-up basis rule means you typically will not owe capital gains taxes if you sell quickly at or near the appraised value. However, if you wait and the property appreciates, you could face capital gains on that increase.

Option 2: Renting the Property

Converting an inherited home into a rental property can provide steady passive income while maintaining ownership of a potentially appreciating asset. This option works well when the property is in a desirable rental market and you are prepared for the responsibilities of being a landlord.

Keep in mind that becoming a landlord involves tenant management, property maintenance, and compliance with local housing laws. You may want to hire a property management company, which typically charges 8% to 12% of monthly rent.

Option 3: Moving into the Home

If the inherited property suits your living situation, moving in can be financially advantageous. You will avoid the costs of selling and can benefit from any future appreciation. Additionally, living in the home as your primary residence for at least two years may qualify you for the capital gains exclusion if you eventually sell.

Managing an Inheritance with Multiple Heirs

When a property is left to multiple beneficiaries, reaching a consensus on what to do with it can be challenging. Clear communication and understanding of your options can help prevent family conflicts.

If one heir wants to keep the property while others prefer to sell, a sibling buyout may be the solution. The heir who wants to retain the property can purchase the ownership interests of the other heirs at fair market value. This requires getting an accurate appraisal and often involves financing the buyout through a mortgage or personal funds.

In cases where heirs cannot agree, a court may order a partition sale, which can result in lower proceeds and higher legal costs for everyone involved. Working with a mediator or estate attorney early in the process can help avoid this outcome.

Understanding the Probate Process

Probate is the legal process that validates a will and authorizes the distribution of assets to heirs. The timeline and complexity of probate vary significantly by state and circumstances.

Ways to Avoid or Simplify Probate

Some properties can pass to heirs without going through probate, depending on how the estate was structured:

Living Trust: If the property was held in a revocable living trust, it transfers directly to beneficiaries without court involvement. This is typically the fastest method of inheritance.

Transfer on Death Deed: Some states allow property owners to file a beneficiary deed that automatically transfers ownership upon death, bypassing probate entirely.

Joint Tenancy with Right of Survivorship: When property is owned this way, the surviving owner automatically inherits the deceased owner's share.

Tax Implications of Inherited Property

Understanding the tax consequences of inheriting real estate is crucial for making informed decisions. The good news is that most inheritances do not trigger immediate tax liability, and several provisions work in favor of heirs.

Federal Estate Tax

The federal estate tax only applies to estates exceeding $13.99 million in 2025. This means the vast majority of inherited properties will not trigger federal estate taxes. Estates below this threshold pass to heirs free of federal estate tax.

State Inheritance and Estate Taxes

While there is no federal inheritance tax, some states impose their own taxes on inherited property. Understanding your state's requirements is essential for proper planning.

In states with inheritance taxes, the rate you pay typically depends on your relationship to the deceased. Spouses are generally exempt, and children often receive preferential treatment with lower rates or higher exemption thresholds.

The Stepped-Up Basis Advantage

One of the most significant tax benefits for inherited property is the stepped-up basis. When you inherit real estate, your cost basis is reset to the fair market value at the date of death, not what the original owner paid for the property.

For example, if your parent purchased a home for $150,000 decades ago and it is worth $450,000 at the time of their death, your cost basis becomes $450,000. If you sell the property for $450,000, you owe no capital gains tax because there is no gain above your basis.

Capital Gains Tax When Selling

If you hold the inherited property and it appreciates before you sell, you will owe capital gains tax on the increase in value above your stepped-up basis. The rate depends on your income and how long you have owned the property.

Note: Taxpayers with income above certain thresholds may also owe the 3.8% Net Investment Income Tax on capital gains.

Strategies to Minimize Capital Gains Taxes

If you want to reduce or eliminate capital gains taxes on an inherited property, several strategies may help.

Sell Immediately

Since your cost basis is the fair market value at the time of inheritance, selling quickly before the property appreciates means little or no capital gains tax. This is often the simplest approach when you do not want to keep the property.

Live in the Property First

If you use the inherited property as your primary residence for at least two of the five years before selling, you may qualify for the home sale exclusion. This allows you to exclude up to $250,000 in capital gains if filing single, or $500,000 if married filing jointly.

1031 Exchange for Investment Properties

If you rent out the inherited property and later want to sell, a 1031 exchange allows you to defer capital gains taxes by reinvesting the proceeds into another investment property of equal or greater value. This strategy can be repeated indefinitely, potentially deferring taxes for your lifetime.

Handling Mortgages and Liens on Inherited Property

Inheriting a house with an existing mortgage or other liens adds another layer of complexity. Understanding your options can help you make the best decision.

Properties with a Traditional Mortgage

When you inherit a property with a mortgage, you assume responsibility for the debt. However, federal law protects heirs by prohibiting lenders from calling the loan due simply because of a change in ownership due to inheritance. Your options include:

Continue Making Payments: Keep the existing mortgage in place while you decide what to do with the property.

Assume the Loan: Take over the mortgage in your name, keeping the existing terms and interest rate.

Refinance: Obtain a new mortgage in your name, potentially at different terms.

Pay Off the Mortgage: Use other assets, life insurance proceeds, or the sale of the property to pay off the balance.

Properties with a Reverse Mortgage

Reverse mortgages present unique challenges for heirs. When the borrower passes away, the loan becomes due, typically within 30 days of notification. However, heirs usually have options:

You can pay off the reverse mortgage balance and keep the property. If the home is worth more than the loan balance, you keep the equity. If the balance exceeds the home's value, you can sell the property for at least 95% of the appraised value, with mortgage insurance covering any shortfall.

Extensions are typically available if you are actively working to sell the property or secure financing, usually granted in six-month increments.

Dealing with Liens

A property may have liens attached from unpaid taxes, contractor bills, or other debts. These liens must typically be satisfied before you can sell the property with clear title. Options include paying off the lien from estate funds, negotiating a settlement, or allowing the sale proceeds to cover the debt at closing.

Guide to Selling an Inherited Property

If you decide to sell, following a structured approach can help you achieve the best outcome while minimizing stress during an already emotional time.

Complete the Probate Process

You cannot transfer ownership of a property until probate is complete and you have legal authority to sell. Work with the estate executor or attorney to understand the timeline and any court approvals that may be required.

Declutter and Prepare the Home

Clearing out the deceased's belongings can be one of the most emotionally challenging aspects of selling an inherited property. Consider holding an estate sale, donating items to charity, or hiring a professional estate cleanout service.

Make Strategic Updates

Focus on cosmetic improvements rather than major renovations. Fresh paint, updated light fixtures, professional cleaning, and basic landscaping can significantly improve the home's appeal without requiring substantial investment.

Hire an Experienced Agent

Working with a top-performing real estate agent who has experience with estate sales can make a significant difference. These agents understand the unique considerations involved and can guide you through the process while maximizing your proceeds.

Consider a Cash Sale

If speed is your priority or the property needs significant work, selling to a cash buyer may be an attractive option. While you may receive less than market value, you avoid repair costs, staging expenses, and the uncertainty of a traditional sale. Learn more about the process of selling a home as-is.

Costs Associated with Inherited Property

Inheriting a home comes with ongoing expenses that can add up quickly. Understanding these costs helps you make an informed decision about keeping or selling the property.

Managing the Emotional Aspects

Inheriting a home is not just a financial transaction. It often involves processing grief while making significant decisions about a property filled with memories. Give yourself time to work through these emotions, and do not rush into decisions you may regret.

If family disagreements arise, consider involving a neutral third party such as a mediator or family counselor. The cost of professional mediation is typically far less than the legal fees and family damage that can result from prolonged disputes.

Frequently Asked Questions

Making the Right Decision for Your Situation

Inheriting a house is a significant event that requires balancing financial considerations with emotional factors. Whether you choose to sell, rent, or move into the property, taking time to understand your options and their implications will help you make the best decision for your circumstances.

Remember that you do not have to navigate this process alone. Estate attorneys can guide you through probate, tax professionals can help you understand the financial implications, and experienced real estate agents can maximize your outcomes if you decide to sell.

The most important step is to avoid making rushed decisions during an emotional time. Take the time you need to process your loss, gather information, and consult with professionals before committing to a course of action.