What should you do when you inherit a house?
Apart from the loss that typically precipitates such an inheritance, it seems like a pretty good deal. You now own a piece of valuable real estate that you didn’t have to pay for. Deciding what to do with that house, however, isn’t always simple. Should you live in it? Sell it? Rent it out?
Let’s take a look at the options and what each path might mean for you now and in the future.
Quick Overview:
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First Things First: Handle the Immediate Practicalities
Before you decide what to do with the property, there are some crucial steps to take right away.
- Gather legal documents
Locate the will, trust documents, or any transfer-on-death deed that establishes your ownership. If the property needs to go through probate, you’ll need to work with the estate’s executor and possibly an attorney to complete the process. This ensures the title can be legally transferred into your name.
- Secure the property
If the house is vacant, change the locks, keep utilities on and switch the accounts into your name, and make sure the property remains insured. Take a full set of photos to document its current condition.
- Check for mortgages, liens, or debts
Just because you inherit a house doesn’t necessarily mean it’s free and clear. There may be an outstanding mortgage, a home equity line of credit, or other obligations. You’ll want to find out exactly what financial liabilities come with the property.
- Get a professional valuation
An appraisal or comparative market analysis gives you a clear sense of the home’s fair market value. This figure is crucial not only for planning a potential sale or rental but also for tax purposes, since it establishes your “step-up in basis.”
- Talk to professionals early
Even if you’re comfortable handling finances, estate property can get complicated. A probate or estate attorney, a CPA, and a knowledgeable local real estate agent can help you avoid expensive mistakes. Sonoma County has its own property tax rules, wildfire insurance issues, and real estate dynamics that make local guidance invaluable. If you’re even thinking about renting it out, talk to a property manager so you know what you can expect to earn in rent and what the maintenance costs may be. Contact us, and we can give you some general information to consider before you make a decision.
Understand Key Legal and Tax Implications
When you inherit real estate, the property’s tax basis usually “steps up” to its market value at the date of the previous owner’s death. If you sell the home shortly after inheriting, you may owe little or no capital gains tax because your sale price and tax basis are roughly the same. If you hold it for many years and then sell at a higher price, you’d owe capital gains on the amount it appreciated after you inherited it.
Property tax reassessments are also something to be aware of. In California, a change in ownership can trigger a reassessment of property taxes to current market value. There are some exemptions for parent-to-child transfers, but they are more limited than they once were due to changes in state law. If the home is reassessed, your property tax bill may increase significantly.
Insurance Considerations
In Sonoma County, wildfire risk can affect the availability and cost of homeowners insurance. Some insurers have reduced coverage in certain high-risk zones, so make sure you secure adequate protection as soon as possible.
Weigh Your Options
Once the legal and financial groundwork is in place, and you have full legal possession of the property, it’s time to decide what to do with the house. Here’s a closer look at your three main paths.
- Move In and Make It Your Home
This is often the most personal choice. Many people inherit a family home and decide to keep it as their primary residence for sentimental reasons, financial benefits, or both.
There are advantages to moving in, starting with your own emotional connection. You preserve family history and memories. This might reduce your housing costs, too. If the property is paid off, your monthly expenses may be far lower than renting or paying a mortgage elsewhere. By making it your primary residence, you may also benefit from certain property tax exemptions and capital gains exclusions if you sell in the future.
However, many inherited homes need repairs or modernization. If reassessed, your tax bill could be higher than the previous owner’s. Consider your lifestyle, too. Moving may not make sense if your job, family, or daily routines are centered elsewhere.
- Sell the Property
Selling can be the cleanest and most financially straightforward choice, especially if you don’t want to maintain another property or deal with ongoing expenses. It can also provide a significant financial cushion. You can use the proceeds of your sale to invest, pay down debt, or diversify your financial portfolio. When you sell, you’re gaining all of the profits of this inheritance right away, and as a one-time transaction. It’s simple. You avoid the responsibilities of homeownership and landlord duties.
If you sell soon after inheriting, the step-up in basis often means little or no capital gains tax. Sonoma County has seen steady appreciation over time, making a sale potentially lucrative.
Selling will cost you a bit of money in real estate agent commissions, closing costs, and potential repairs or staging expenses. The market also has to cooperate if you’re going to make any money on the sale. Think about the emotional ramifications of selling the property, too. It’s important that you’re ready to let go, especially if this was a family home or if it belonged to someone you cared about.
If you do sell:
- Get at least two or three opinions from reputable real estate agents on pricing and strategy. We can help with this.
- Decide whether you want to make improvements before listing or sell “as-is.”
- Work closely with your tax advisor to determine the best timing for the sale.
- Rent the Property
If you’re not ready to sell and don’t want to move in, renting the house out can generate monthly income while allowing the property to continue appreciating. Advantages of renting out the home include steady cash flow. Monthly rent can cover taxes, insurance, maintenance, and even produce profit. There’s also the potential for long-term asset growth. Sonoma County houses have historically appreciated well, especially in desirable neighborhoods near wine country, good schools, or transportation routes. There’s also more flexibility. You can hold the property for a few years and sell later when the market is more favorable.
With renting comes management responsibilities. Being a landlord takes time and energy, from screening tenants to handling repairs and legal compliance. You’ll want to work with a professional property management team like ours so that the leasing, management, and maintenance does not completely take over your life. The regulatory environment is also strict. California has strict tenant protections and rent control rules that must be followed carefully.
Renting can also introduce risk and liability. There’s always the possibility of unpaid rent, property damage, or unexpected repairs.
If you decide to rent out the home, partner with a professional property manager as soon as possible to handle day-to-day operations.
Why Holding on to Sonoma County Real Estate Can Be Smart
The decision will depend on your own personal circumstances and financial considerations. Generally, we recommend people hold onto an asset that they’ve inherited. Here’s why:
- Real estate in Sonoma County is a strong asset. Limited housing inventory, scenic landscapes, access to wine country amenities, and proximity to the Bay Area make properties in this region especially desirable. Historically, values have appreciated steadily over time, even with market fluctuations.
- Sonoma’s lifestyle appeal often means properties rent quickly, especially in well-located towns and neighborhoods. This can make keeping the house as an investment, even for just a few years, a financially attractive option.
For many people, keeping a Sonoma County home has turned into a significant source of long-term wealth.
Inheriting a house is more than a financial event. It’s a personal moment, especially if you inherited this home from a family member or a close friend. The decision you make doesn’t have to be rushed. If you need time, you can secure the property and rent it short-term or simply hold it while you consider your options carefully.
Whether you choose to live in it, sell it, or rent it out, the key is to make an informed decision based on solid numbers, local market conditions, and your personal goals. Get some good advice.
We’re willing to provide that advice. Please contact us at Prestige Real Estate & Property Management. We manage homes in Sonoma County, including Santa Rosa, Windsor, Sebastopol, Petaluma, and Rohnert Park.
