Inheriting a house can be a nostalgic and exciting part of what is often a period of transition and unknowns.
While we’d give anything to just grab the keys, pull up to the house, and consider it inherited (ta da!), the truth is that ownership and taxes in real estate are pretty complicated. Well, more than that—it’s insanely complicated.
Here’s a good look at how all this works:
Quick Facts About Inheriting a House
- Unless you co-owned the home with the deceased and had the Right of Survivorship, the house will have to go through probate first.
- Just because you inherit the house doesn’t mean that you own it free and clear, as you’ll also inherit any mortgage that is still tied to the property.
- You will likely receive a step up in basis of the taxable value of the house, which might help you out quite a bit in the long run.
- It’s possible that you are a “co-inheritor” in the house, meaning that you have received the home with other beneficiaries. Don’t assume that you’re the only inheritor until you read the will.
- You will likely need to re-draft the insurance policy on the property to name yourself as the property owner.
- When you inherit a house, you become responsible for any tax liens on the property.
Checklist for Inheriting a house
- Read the deceased’s will to determine your ownership status.
- Locate the deed to the house and determine if the deed needs to be changed.
- Research if the house still has a mortgage tied to it.
- Research if the house has any tax liens attached to it.
- Understand the step up in cost basis that you will receive.
- Have the insurance policy on the property rewritten.
- Inspect the house thoroughly to determine if repairs are needed.
- Determine whether you want to live in the house, rent it out as the landlord, or sell it.
- If you decide to sell the house, determine the capital gains tax liability that has accrued.
- Receive the keys for the house from the estate executor or executrix.
Terms You May See When Inheriting a Home
Real Property - A parcel of land and everything (houses, structures, features) on the land.
Title - A title isn’t a document. It’s just an intangible collection of the rights that are included in owning “real property.”
Deed - A deed is the physical document that transfers legal ownership, and therefore title between properties.
Sole Ownership - Property that is fully owned by a single individual.
Joint Tenancy - Property that is owned by two or more people who share equal rights and split the ownership. When one of the owners dies, the property goes to the surviving owner(s).
Fee Simple - This phrase means that you have complete and total ownership over the land. This concept is often used in conjunction with sole ownership.
Free and Clear - Any real estate that does not have debts or liens tied to it.
Easement - When you have rights to a property but don’t have ownership. You might have the right to enjoy or use but not own if an easement exists.
Cost Basis - The original value or price of an asset for tax purposes.
Step Up In Basis - The new cost basis established on the original owner’s date of death.
Capital Gains - The profit made from the sale of a significant piece of property (a “capital” asset).
Encumbrance - A claim or restriction on somebody’s title.
How to Inherit a House — An Expert Breakdown
Inheriting a house can be tricky, but asking yourself the following 3 questions will help you navigate the process smoothly.
- Do I know what my ownership status will be?
- Do I have all the correct paperwork to inherit?
- What do I want to do with the house?
Let’s take a look at those questions in more detail:
Do I know what my ownership status will be?
If you take a look at the deceased’s will, you should be able to determine the answer to this question relatively easily. There are really only two options—either you are named as the only inheritor of the house, or you are named as a co-inheritor of the house.
If you are named as the only inheritor, then you can likely assume that you will receive rights to the house under a sole ownership structure.
Sole ownership of property means that you are the property’s only owner. You have full right and authority over the property, and no one else can make ownership claims against the property.
If you are named as a co-inheritor—meaning that you are receiving the house with more than one other person—then you will need to read carefully through the will to see what ownership rights you will receive.
As co-inheritor of the house, you might own the property with another individual as joint tenants with right of survivorship. Or, depending on the will’s stipulations, you could potentially own the house as tenants in common.
The important thing to remember here is to read the deceased’s will. The will is the governing document when it comes to distributing assets and titling property, so do not downplay the document’s significance.
Do I have all the correct paperwork to inherit?
In addition to the deceased’s will, there is one other important document that you should locate before you assume ownership of the house: the deed.
The deed is the physical document that conveys ownership (and the title) to property. When it comes to a house, the deed is by far the most important document used to determine ownership.
If you inherit a house, will you need to change the deed? No, not always.
Depending on the state where the house is located, you might not need to change the deed when you inherit the house.
In North Carolina, for example, an inheritor is not required to update the deed when inheriting a house. Instead, a copy of the original owner’s death certificate and the deceased’s will are all that is needed to prove ownership.
The idea is that the deed, death certificate, and will are enough to show that the original owner intended to distribute the house to the inheritor, so updating the deed is not really necessary.
Other states may have different rules. Some states require that the executor file a “deed of distribution” with the probate court, which serves to update the deed to show that the house has been distributed to the inheritor. Other states require that the inheritor updates the deed through the probate court.
What do I want to do with the house?
It seems like such a simple question. But if you are inheriting a house, you’re likely grappling with the question: what do I want to do with it?
Homes can have sentimental value, and you might feel that you have a responsibility to hold on to the house and protect it at all costs. But depending on where you are in your personal life, you may not be in the position to maintain and care for a house.
It may be better for you to sell the house, rather than keeping it and having to handle the maintenance and conservation of the home yourself. Or, depending on your own free time and capabilities, you may want to consider retaining ownership of the house but renting it out to others.
Those are your three main options: (1) Keep the house, (2) Sell the house, or (3) Rent the house.
At the end of the day, what you do with the house is your own decision. But figuring out the answer to that question before you inherit the house will save you stress and worry in the long run.
How an Inherited House is Taxed
There are 5 important rules to remember when it comes to how inherited houses are taxed:
- The house’s value will be included in the entire taxable value of the estate during probate
- You receive a step up in cost basis when you inherit a house
- You are liable for any capital gains if you decide to sell the house after inheriting
- You are liable for any tax liens tied to the house
- You will be liable to pay any property taxes on the inherited house
Let’s take a look at those 5 steps in more depth:
The house’s value is included in the estate during probate
When a homeowner passes away, that house is nearly always included in the probate process. In fact, the ownership of a house is one of the main reasons that most people’s estates are disqualified from avoiding probate.
If you’re worried about the possibility of having to pay estate taxes on a house that you inherit, don’t worry. The deceased’s estate will cover any estate taxes—or death taxes—during the probate process.
That doesn’t mean that you won’t be liable for any taxes that accrue after you inherit the house—but we’ll get to that more in just a little bit.
You receive a step up in cost basis
One of the best parts of inheriting a house is that you receive a step up in cost basis when you inherit the property.
The basis is calculated from the house’s fair market value at the original owner’s date of death.
As we wrote earlier, a property’s cost basis is the original value or price of an asset for tax purposes. When the state or federal government is determining how much you owe in taxes, they will look at how much the asset has grown from that original cost basis.
Let’s look at an example of a step up in basis:
John, a widower, buys a house in 2016 for $250,000. The original cost basis when John buys the house is the home’s fair market value—$250,000.
John passes away in 2022, and his son, Oscar, is named as the inheritor of the house. On the date of John’s death, the house’s fair market value is $400,000.
Oscar receives a step up in basis, meaning that the home’s new cost basis when he inherits the house is $400,000. If Oscar ever decides to sell the house, he will be liable to pay for the gains accrued from that initial $400,000 basis.
That’s a perfect segue into our next point:
You are liable for capital gains if you sell the house
We know that you receive a new cost basis (a step up in basis) when you inherit the home. But what if you inherit the house, hold onto it for a decade, and then decide to sell it?
You will owe taxes on the gains accrued off of the initial cost basis when you received the house.
Let’s take a look back at our example of Oscar.
Oscar receives the house in 2022 at a cost basis of $400,000. In 2023, Oscar decides to sell the house. By this point, the home is now worth a fair market value of approximately $540,000.
Oscar is liable for the capital gains accrued on the house—so he’ll end up paying taxes on the difference between $540,000 and his basis of $400,000, or $140,000.
So remember: just because you inherit a house doesn’t mean you won’t be off the hook for any taxes if you ever decide to sell the house in the future.
Speaking of taxes…
You are liable for property taxes
You probably know of the two certainties of life—death and taxes. But when it comes to taxes, did you know that property taxes are the oldest form of taxation in history? Now you know.
Contrary to what you might think, the federal government doesn’t collect property taxes. The taxation of real estate is overseen by the state or local county government.
When you inherit a house, you are liable for the property taxes that accrue as soon as you assume ownership.
What happens if you don’t pay property taxes? You’ll likely be issued a lien by the government.
What’s a lien? We’re glad you asked.
You are liable for tax liens
Tax liens are never fun. A lien is the government’s claim against any property that has outstanding taxes or owes money to the local or federal government.
A lien is not the same as a tax levy, which is when the government actually seizes your property to repay an outstanding debt. A lien is essentially the government’s way of warning you that you owe outstanding taxes or debts and that the government is claiming an interest on your property.
Now, here’s the question: do tax liens go away when someone dies? No, they do not.
If a parcel of property has a tax lien on it and the original owner dies, the tax lien does not disappear. The deceased’s estate must pay off the outstanding debts in order to remove the lien.
What if the deceased’s estate cannot pay off the outstanding debts? Well, the government will most likely issue a levy and seize the house.
What happens if a tax lien is issued after you inherit the house? You are liable.
If you inherit a house and become the sole property owner, you are liable to pay any property taxes that accrue after you assume ownership.
If you don’t pay property taxes? The government will issue a lien.
If you don’t pay the lien or reach a settlement with the government? The government will issue a levy and seize the property.
If you remember one thing, remember this: you are responsible for the taxes that accrue when you inherit a house.
How to Pay the Least Taxes on an Inherited House
It is difficult to avoid paying property taxes, and if you learned one thing in the section above then you should know that not paying your property taxes is a sure way to encounter a tax lien or a tax levy.
But there is one type of tax that you can minimize when you inherit a house: the capital gains tax.
The government wants to discourage homeowners from inheriting a house and flipping it for a quick profit, so there are incentives in place to encourage individuals to stay in a house for a set period of time.
We know that capital gains taxes kick in when you sell a house for more than the cost basis at the time of inheritance. So, in our example of Oscar that we mentioned earlier, Oscar owes capital gains tax on the difference between $400,000 (the fair market value of the house when he inherited it) and $540,000 (the fair market value of the house when he decides to sell it). So Oscar owes capital gains taxes on $140,000.
But here’s the catch: the IRS allows single tax filers the chance to exclude up to $250,000 in capital gains from the sale of a house. Married couples who file a joint return can exclude up to $500,000 in capital gains from the sale of the house.
To take advantage of these rules, however, you have to live in the house for at least 2 of the 5 years preceding the sale.
So let’s revisit our example:
Oscar inherits a house with a cost basis of $400,000 in 2022. Oscar lives in the house from 2022 to 2024, but then he decides to move to a new house before he sells the inherited house. In 2026, Oscar decides to sell the inherited house for $650,000.
We need to ask a couple of questions:
Did Oscar live in the inherited house for at least 2 of the 5 years preceding the sale? Yes, he did.
So how much does he owe in capital gains? Nothing at all, because he can exclude the entire $250,000 gain.
Here’s the bottom line: if you inherit a house and aren’t sure whether you want to live in it or not, remember that $250,000 in growth is tax-free if you choose to live in the house for just 2 years.
How to Get Access to a House You Inherited
Inheriting a house requires a tremendous amount of patience.
Why? Well, you won’t receive the house immediately after the original owner passes away.
Here’s a timeline of what will likely occur before a beneficiary can access an inherited house.
- The original owner passes away
- The executor assumes a temporary custodial role over the house and exercises necessary care to preserve and protect the property
- The house will be included in the taxable estate and will go through probate
- The assets will be distributed from the estate at the end of the probate process, including the house
- You will be granted ownership over the house
That is the barebones framework of receiving access to a house that you inherit, so don’t think it’s all that simple.
Included within those 5 steps are a number of small details, including the research that you must do in regard to the current status of the deed, the mortgage tied to the house, the tax liability of the house, and the expected property taxes that the house accrues.
How to Transfer Ownership of a House You Inherited
Transferring ownership to yourself when you inherit a house can be complex, and the rules often vary from state to state.
Some states require that you file for a new deed to the house, as the new deed would list you as the owner. Other states just require that you hold on to the deed from the original owner. That deed, along with a death certificate and a copy of the will, would be enough to show that you have ownership over the house.
Whatever the case may be, transferring ownership will change depending on whether a mortgage is tied to the house.
How to transfer a house with a mortgage
If you inherit a house with a mortgage, you become responsible for the mortgage.
In the eyes of the law, a mortgage is another form of debt. Just as you inherit any debts that might be tied to the house, you also inherit the mortgage.
You’ll need to determine who the lender is—the institution through which the mortgage was originally created—and then you’ll need to contact the lender to update any paperwork to your name.
To update the mortgage paperwork, you will likely need to show a certificate of death and possibly the original will. The institution will work with you to ensure that the necessary paperwork is updated to reflect your name and your new status as the house’s owner.
Once the paperwork has been updated, you will begin making scheduled mortgage payments.
What if you don’t want to keep the house but instead want to sell it?
If you’re considering selling the property, you’ll need to take the proceeds from the sale to pay off the outstanding mortgage. You’ll receive any cash that is left over after the mortgage has been paid.
How to transfer an inherited house without a mortgage
If you inherit a house without a mortgage, then you’re in luck. Unless there are other outstanding loans tied to the house, you will likely inherit the home under a free and clear title.
Holding a title free and clear means that no creditor has a claim to the property that you own.
If you inherit the house free and clear, you can consider the property as an added asset in your portfolio. There aren’t any mortgage payments to worry about, and you won’t need to contact any lender to ask them to update the mortgage paperwork.
How to transfer deed of inherited house
In the United States, each parcel of property is recorded within the county where the property is located. Usually, there is an office in the county that records each property conveyance, gift, or transfer that occurs.
In some states, like California, each county has a “County Recorder’s Office” or “Office of the Assessor-Recorder.”
In other states, like North Carolina, the institution is called the “Office of Registrar of Deeds.”
For the purpose of this article, we’ll stick primarily to the Registrar of Deeds when referring to this institution. But regardless of the office’s name, one of your first steps when inheriting a house will be to go to the Registrar of Deeds to file the property transfer.
If you are not serving as the executor, then it’s possible that the executor of the estate will do this on your behalf—or even do it with you. If you are serving as the executor and are also the individual who will receive the house, then this is a crucial step that you’ll need to remember.
The Registrar of Deeds has all the deeds of properties in the county on file. If you don’t have a copy of the deed available to you, you can ask the Registrar of Deeds for a copy and they will be able to provide one to you.
As we’ve noted before, many states do not require that you update the deed when you inherit the house. As long as you have a copy of the deceased’s will and death certificate, the deed does not need to be transferred to your name.
Other states vary in their rules surrounding deed transfers. Some states require that you update the deed in your own name, even if you have inherited the property through the deceased’s will.
To update the deed in your own name, you will need to visit your local Registrar of Deeds and ask what documentation they require to proceed with the update. They will likely ask for a copy of the death certificate, the will, and personal identification documents from you.
Once the process has been completed, the deed will reflect your ownership over the property.
Everything You Need to Transfer a House
When you are transferring a house, you should have the following documents:
- A copy of the deceased’s will.
- A copy of the death certificate.
- A copy of the current deed (obtained at the Registrar of Deeds office).
- The mortgage paperwork (obtained from the lender)
- Any tax documentation (including previous liens).
- Property tax documentation.
Important Deadlines For Inheriting a House
- In most cases, a house is treated like any other asset and will need to go through the probate process. A sole ownership home outside of a trust must go through probate.
- The executor must follow all of the state’s guidelines and deadlines on filing a will, petitioning the probate court, notifying creditors, making an inventory of assets, etc.
Also, the executor—and members of the deceased’s family—should remember to never empty a house before probate.
What to Do with The Money from an Inherited House
Inheriting a house can be a life-changing event when it comes to your own assets.
In terms of building generational wealth—or wealth that can pass from one generation to the next—real estate is a key ingredient.
One of the benefits of real estate is how flexible it can be. Do you want to rent out the house or property and collect income? Do you want to sell the house and invest the proceeds?
We recently teamed up with our friends over at Finwell to help share some insights on the topic of creating generational wealth. And as you’ll see from our conversation, real estate can be a vital component of the wealth-building process.
When to Hire a Professional to Manage an Inherited House
Should you hire a professional to manage the house that you inherited? It depends.
If you live in one state but inherited a house that is located in another state, you might have trouble maintaining and preserving the house that you inherited. In this instance, hiring an individual to oversee the house could be a good idea.
If the property that you inherited is complex—perhaps the house is very large, or maybe it’s very old and requires quite a bit of maintenance—then hiring a professional to care for the house could be smart.
It ultimately comes down to your own situation and the best practice for you. If you are not comfortable caring for the house that you inherited, a professional may be able to bring you comfort and peace of mind in knowing that the house is in good hands.
Other Tips for Inheriting House
- Inheritances are just another step in the probate process. Don’t do anything drastic before the probate process has been completed.
- If you are the executor and the deceased owned the home outright (free and clear), chances are you have to go through probate.
- Other things you need to do are figure out who the executor is, probate the estate, file notice to creditors, complete an inventory of assets, etc. To learn more about the steps involved in this process, read: What to Do When Someone Dies.
- If the deceased’s belongings are still in the house, you need to figure out if the belongings should be distributed, donated, or discarded. Check out our checklist on what to do with someone's belongings before you proceed.
FAQ
How do you change a deed when you inherit property?
Depending on the state where the house is located, you might not need to change the deed if you have other documentation (namely the will) that can prove your status as inheritor.
Some states do require that you change the deed when you inherit property. In those states, you’ll need to visit the Registrar of Deeds office and update the deed by presenting a copy of the deceased’s will and death certificate.
What is property you inherit treated as?
If you are the only inheritor, then the property is treated as sole ownership property. This means that you are the only owner of the property and do not share ownership with any other individual.
What is property treated as if you are a co-inheritor?
If you are the co-inheritor of the house, then the property will be treated as Tenancy in Common or Joint Tenancy. These forms of real estate ownership may have a significant impact on how the property is distributed after your death.
To learn more about these ownership structures, read: The 5 Types of Real Estate Ownership You Should Know About — Complete Guide
Is it better to receive property as a gift or inheritance?
It’s almost always better to receive property as inheritance, rather than receiving the property as a gift from the deceased.
Why? It all comes back to capital gains.
When you receive a gift of real estate, you don’t receive a step up in basis. If you ever decide to sell the property, you could be facing massive capital gain liability.
When you receive real estate as an inheritance, you receive a step up in basis. Your new cost basis is the market value at the original owner’s date of death. If you ever decide to sell the property, your capital gain liability would be much lower.
Do property taxes increase when you inherit a house?
Depending on the state where the property is located, property taxes might increase when an individual inherits the house.
In some states, property value is reassessed each time the property changes hands—even through inheritance. So the property value might jump up when you inherit a home, meaning that you end up paying more than your predecessor in property taxes.
In other states, property value is reassessed on a periodic basis—like every 5 years—so you might not experience an increase in property taxes when you inherit a house.
As a rule of thumb, however: property taxes are based on the property’s appraised value, and the value of real estate tends to rise continually. You should expect to pay higher property taxes than the individual who owned the house before you ever had to pay.
Can a US citizen inherit property in Mexico or other countries?
Yes, in most cases a US citizen can inherit property in Mexico or other countries.
In Mexico, there are two types of property—property within the “restricted zone” and property outside of the “restricted zone.” Without going into too much detail, it’s important to know that foreigners can only own property within Mexico’s restricted zone.
Mexico’s rules aren’t rare, and most countries will have specific rules dictating how and where US citizens can inherit land. If you are set to inherit land in another country, make sure you research the country’s rules on owning land as a US citizen.
What happens to a house if someone dies without a will?
If someone dies without a will, the house—and the rest of the deceased’s property—will be distributed according to the probate court’s intestate succession laws.
In intestate succession, the probate court will likely distribute the house to the deceased’s closest living blood relative, or next of kin. This obviously has a huge impact on the entire distribution of the estate, and the end result could be exactly what the deceased wanted to avoid.
Should I hire a title lawyer if I’m inheriting a house?
In most cases, you won’t need to hire a title lawyer if you’re inheriting a house. The process should be relatively straightforward, and the local county’s Registrar of Deeds office should be able to walk you through any issues.
In some complex instances, however, there may be times when you will need to consult with a title attorney. If there is an existing title dispute over property, for example, you may need to hire a title lawyer to represent your side.
Or, if the original deed was never filed with the Registrar of Deeds office, you may have a gap in the ownership of the property. To resolve this issue, you should immediately consult with a title lawyer to ensure that your title to the property is upheld.
What if you’re inheriting more than a house?
Chances are you’ve inherited more than one type of asset, and most asset types come with different nuances and considerations.
We've written inheritance guides like this on a few major asset classes, and you can read those by going to the Inheritance Advice section of the Atticus® Executor's Resource Library.
So pick the ones you got and read on for sage and level-headed advice. And we’ll do that without an email capture as long as you swear to check out this tool we've built (if you are an executor or settling an estate, this is a must-see).
