• First, figure out how the house legally passes to you. It may transfer through a trust, joint ownership, a transfer-on-death deed, or probate.
• Expect to revisit the property tax bill. California’s Proposition 19 rules can trigger reassessment, even when a house passes from parent to child.
• Get a date-of-death value for the property. Your tax basis will generally be tied to that value, which can make a big difference if you sell.

Will Inheriting Property Be a Boon or a Bust?

You may have known for years that you were going to inherit a property when someone died. That property might have generated income that paid for your parent’s long-term care expenses or provided income to someone who had little other resources. 

You might be excited about the prospect of being the beneficiary of that asset and its income. Or maybe you’re excited to be able to move into this house and call it your own. This might be the only way you can afford to own a home. 

Before you get too excited, there’s much to consider when inheriting a piece of real estate. The rules that applied to the person who gave you this home might not apply to you. Going into this acquisition with eyes wide open will serve you well.

How Does an Inherited House Pass to You in California?

An inherited house doesn’t always become yours the moment someone dies, no matter what the dead person said before dying. How it transfers depends on the deed, the estate plan, and how the property was owned.

This is the first thing you will have to sort out before even considering selling, refinancing, or moving in.

A home held in a living trust may pass through the trust. Property owned in joint tenancy can pass to the surviving owner. Someone might have the right to live in it for the rest of their life. The house may need to go through probate.

Be careful not to jump to the conclusion that being named in a will or trust gives you immediate control over the property. It may not. Before anyone calls a Realtor or starts making plans for the house, confirm who actually has authority to act.

What Happens to Property Taxes When You Inherit a California Home?

This might be your biggest (and nastiest) surprise. The property taxes on this property may change after you inherit it. Proposition 19 narrowed the circumstances in which children can keep a parent’s existing property tax assessment, and you’ll want to understand how it works.

Proposition 19 Changed the Parent-to-Child Rules

A lot of people still assume that if Mom paid property taxes based on a decades-old purchase price, her children will simply keep paying roughly the same amount. That is no longer a safe assumption.

California voters passed Proposition 19, which went into effect on February 16th, 2021. That changed the property tax rules for most people inheriting real estate. 

For a parent-to-child transfer to qualify for the current family home exclusion, the home needed to have been the parent’s primary residence and within a year must become the primary residence of the person who inherited it. Otherwise, the whole property gets reassessed.

The numbers matter too. For qualifying transfers from February 16, 2025, through February 15, 2027, the indexed exclusion amount is $1,044,586. If the property’s market value exceeds the parent’s taxable value plus the applicable exclusion, that portion will be reassessed and the property taxes will likely increase.

That can change the economics of keeping the house.

A home that looked inexpensive to hold based on your parent’s old tax bill may look very different after reassessment. I would want that number before deciding the property is a keeper.

Will You Owe Capital Gains Tax on an Inherited House?

You may owe capital gains tax when you eventually sell, but you generally don’t inherit the previous owner’s original purchase price as your tax basis. Your basis is usually tied to the property’s fair market value at death.

The Step-Up in Basis Matters

Suppose your mother bought a Bay Area house for $300,000, and it is worth $1.5 million when she dies.

Your basis will generally be around the $1.5 million date-of-death value, subject to the applicable tax rules. If you sell soon afterward for about $1.5 million, there may be relatively little appreciation to tax.

This is why I would not skip the date-of-death appraisal just because no one plans to sell right away. Years later, reconstructing what a house was worth on a specific date can become a more difficult project.

There is another distinction worth keeping straight. Your Proposition 19 property tax assessment and your income tax basis are not the same calculation. People understandably mix them up, but they answer different tax questions.

Do You Pay Inheritance Tax on a House in California?

California doesn’t impose an inheritance tax on the person receiving the house. Receiving the property also generally doesn’t create income tax simply because you inherited it.

That sounds like the end of the tax conversation, but it’s not.

You can still face a higher property tax bill after the transfer, and you may have capital gains when you later sell. Larger estates can also have separate federal estate tax issues.

What Happens If the Inherited House Has a Mortgage?

The mortgage doesn’t disappear when the owner dies. Before making plans for the house, find out what is owed, who is servicing the loan, and what it costs to keep the property each month. Generally speaking, a lender will not call the mortgage due and require you to pay it off if you have inherited the property. No matter what, you need to keep paying the mortgage on time. 

This is one of the more mundane parts of inheriting a house, but it can drive the decision. 

Should You Keep, Rent, or Sell an Inherited House?

There is no automatic best choice. The right answer depends on the property’s real carrying costs, its tax treatment, your other assets, and whether you would choose to own this house if you were starting from scratch.

Know your numbers

You want to calculate the actual carrying costs, which include:

• Mortgage payment
• Property taxes
• Homeowners insurance
• HOA dues
• Utilities
• Routine maintenance
• Repairs that have been deferred

A house can have $1 million of equity and still be uncomfortable to carry.

That’s easy to miss when everyone is focused on what the property is worth. If the estate takes time to settle, or siblings are still deciding what to do, somebody may be writing checks for months before there is a long-term plan.

Keeping the House

Here is the question I find most useful.

If you had inherited the same amount in cash instead, would you use it to buy this house today?

That doesn’t erase the emotional side of the decision. A family home is not just another line on a balance sheet. However, the question helps separate the house you remember from the asset you would be choosing to own now.

Look at the new property tax bill, maintenance, location, insurance, and how much of your net worth would end up concentrated in one property.

Renting the House

Renting out the house can sound attractive until you run the full numbers. If you plan to use a property manager, include that cost too. 

Start with expected rent, then subtract property taxes, insurance, management, maintenance, vacancy, and the occasional large repair. A roof, sewer line, or HVAC replacement has a way of changing an elegant spreadsheet.

Also confirm the Proposition 19 consequences before assuming renting is the obvious compromise. Most rental properties are reassessed to full market value unless other provisions have been put in place to avoid this situation.

Selling the House

Selling may be the cleanest answer when the property doesn’t fit your life, requires more cash than you want to put into it, or leaves too much of your wealth tied to one piece of California real estate.

Sometimes people worry that selling means they are giving up something emotionally important. I would separate those two ideas. You can value what a home means to your family without deciding that you need to own it indefinitely.

What If You Inherit the House With Siblings?

When siblings inherit together, the math is often easier than the family dynamics. One person may want the house, another may want cash, and a third may be open to renting it.

Do not start with who “deserves” what. Start with a credible property value and a clear picture of the costs.

If one sibling wants to buy out the others, work through the valuation, financing, taxes, and ownership transfer before agreeing on a price over dinner.

The house may be a family asset, but the buyout is still a financial transaction. Treating it that way can make the family conversation easier.

What Should You Do First After Inheriting a California House?

Before choosing what to do with the house, get control of the facts. Confirm who owns it, what it is worth, what it costs to carry, and how the transfer affects the taxes.

I would start here:

• Find the deed, trust, will, mortgage statement, insurance policy, and property tax bill.
• Confirm who currently has authority to act for the property.
• Get a reliable date-of-death valuation.
• Find out whether the property will be reassessed under Proposition 19.
• Calculate the real monthly and annual carrying costs.
• Talk through the tax consequences with your CPA.
• Review the keep, rent, and sell options in the context of the rest of your financial plan.

You don’t have to decide everything in the first few weeks. However, there is a difference between giving yourself time and putting off the financial homework. 

If you’ve inherited a home in California and are not sure whether keeping it, renting it, or selling it makes the most sense, I can help you look at the numbers and how the property fits into the rest of your financial life. Sometimes getting clear on the tradeoffs is enough to make the next step much easier.

Jessica Lanning, CFP®

Email: jessica@lanningfinancial.com
Phone: (415) 354-5699
LinkedIn: linkedin.com/in/jessicalanning
YouTube Channel: Lanning Financial on YouTube

Lanning Financial Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

This blog post is about putting your financial worries into perspective.

My family taught me last week that if you fear triangles, you can convince yourself that anything is a triangle.

I was back visiting the gene pool in rural eastern North Carolina out on my daily walk, when I came upon a snake slithering across the road.

I live mostly in urban environments these days, so this snake encounter was both exciting and terrifying.  Was I in danger?

I remember as a kid being taught to stay away from snakes in general, but in particular to stay away from snakes with triangular heads.  Those belong to rattlesnakes, copperheads, and the dreaded cottonmouth (or water moccasin).

Parents warned that a bite from one of those was certain death.  Stay away from snakes with triangular heads!

Triangular head?!?!  Did this snake have a triangular head?  How can I tell?  What does a triangular head look like?  I had no idea and no access to the internet.

I must’ve stared at the thing for 10 minutes while walking next to it, probably terrifying the poor thing and conceivably running the risk of getting bitten.  (Let’s question the wisdom of that for a minute.)

I figured my body would keep the hawks away as the snake made its way across the road, and I would have adequate time to evaluate the shape of its skull.  By the time it was safely to the other side, I was convinced it had a triangular head.

Encountering Financial Snakes with Triangular Heads

My clients, friends, and family members will do this, too, with their financial issues.

They’ll come across something, let’s say, a 680 credit score on their credit report.

They’ve been told anything below 800 is bad, they’ve been aspiring to a 900 credit score, and then they discover they have the 680 credit score.

Google this enough, read enough articles, talk to enough friends, and anyone can be down a rabbit hole of credit nightmares attributed to a 680 score.

A 680 credit score is not a triangular head and not fatal.  If you’re not applying for credit to buy something (car, house, credit card, etc.) anytime soon, this is actually a non-issue.

Is improving a credit score worthwhile?  If you think you’re going to apply for credit in the future, yes.  But making sure you’re dying 91-year-old mother’s bills are paid on time while she’s in hospice so she keeps a good credit score?  No!  And, yes, I’ve actually had to have that conversation.

Until the 680 credit score holder gets expert advice that applies to their particular situation, they’re in danger of taking a pretty innocuous discovery and turned it into certain death.  So unnecessary.

Sorting Financial Triangles from Not-Triangles

What happens more often than not is clients, friends, and family lack context and education for the financial triangles they think they see.

They’ve heard a story or read an article.  They’re smart people and care a lot about their well-being.  Something vaguely familiar is now in their field of vision, and the danger signals go off.  They get on the internet, social media, and call their friends and family.

There is nothing fundamentally wrong with that course of action, but it perhaps shouldn’t be the last.  Getting solid advice based on your situation is worth a phone call to an expert.  Fix what needs to get fixed and take the rest of your plate.

Rest assured also that there are far fewer triangular heads than you think, and if you do come across one, it’s unlikely to cause certain death and there’s much to do to bring safety to the situation.

I do see financial triangular heads from time to time.  Things like:

• Assets improperly titled.
• Revocable living trusts unfunded.
• Gaps in insurance coverage.
• Lack of proper estate planning or asset protection.
• And others….

Even these can be rectified before they bite in many cases.  Recognize you need help and get it.

It Was a King Snake

Once I could look up the snake I saw, I learned that it was a pretty harmless (and helpful) king snake.  They don’t have triangular heads.  To my untrained and fearful eye, though, I had no way of knowing that.

I did the safest thing:  I kept my distance, and I didn’t pick it up.  No, I have no idea why it crossed the road, but it was fun to watch it wander to the other side.

If you want to talk about the financial triangular heads you’re wondering about and fearing, please reach out.

Lanning Financial Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

You can buy a house and you can get a mortgage

Here is what we have been able to do in the mortgage world lately:

• More and more lenders are making appraisals easier.  We are able to use AXIS appraisals, which are based in the Bay Area (fewer Fresno- and Martinez-based appraisers doing appraisals in San Francisco).
 
• We have a lender that will do 90% loans to $979,750!!  That means we can do a purchase of a $1,088,000 home with 10% down.
 
• Rates are still low.
 
• Lenders are still lending on live-work lofts.
 
• Lenders are still doing recent condo-conversions (TICs to condo).
 
• We have lenders that will still fund in the name of an LLC or corporation.
 
• We have two banks that will underwrite and approve a borrower based upon his/her assets and derive an analytical income for qualifying for the loan versus using income derived from tax returns.  This is like a stated-income loan for those with lots of liquid assets.
 
• We have banks that will allow for a community second mortgage or an employer second mortgage, such as the SF Mayor’s Office of Housing program or Kaiser employee loans.
 
• Most condos can be FHA approved by sending in FHA approval packages to the California office or HUD.  Turn-around time is 2-4 weeks.

The rest of the market?  Just as tedious as it’s ever been.  If you have to get a mortgage, hang in there.  The paperwork is oppressive and the conditions are often silly, but it will happen. Call us if you need some help.

Put your attention on your weekly money

What you want to do now is physically separate your money into different buckets.  Here’s what you do next:

1. Set up multiple accounts at your bank.  Most of the bigger institutions will let you set up multiple accounts for free if you automatically transfer money into them each month (which you will).  Nickname these accounts.
    
2. The first account is your “static account” (call it whatever you want).  All income is deposited here.  Leave money there to meet static expenses.  The rest gets transferred to your “discretionary” accounts and your “savings” accounts.
    
3. Only money for the week gets transferred from the static account into the discretionary account.  Make an agreement with your financial partners (if you have them) as to who is going to get how much.  Each person should get a debit card.  Each person spends that money through the debit card. No credit cards.  Pay your static expenses with a credit card if you want the miles. Use the static account to pay off the credit card, but ONLY for those expenses.
    
4. IMPORTANT POINT:  Get enough money only for the week.  Not the month.  If you spend all your money by day 5 of the week, you can limp along for two days without money.  But if you run out of money on day 15 of the month, two weeks is too long to go without money.  Putting your attention in weeks also helps you focus on what you’re doing.  You will be more present.
    
5. Transfer money automatically each month into your “vacation”, “kitchen remodel”, etc. accounts at a set amount (nickname the accounts as such).  For instance, $50 into the vacation, $200 into the kitchen remodel, etc.
    
6. Watch what happens.  

Here’s what I hear from people who have actually done this:  People start to turn it into a game.  They start to see where they could reduce their static expenses.  They start to contemplate whether they really want that new grill (or purse or pair of shoes) or if they’d rather add that money to their “kitchen remodel” account.  They watch their static expenses shrink, they get more present with their decision-making around the discretionary money, and they love to watch their “kitchen remodel” accounts grow.  It’s a game. It’s fun.  It requires little accounting, as most of it’s done automatically.  You don’t have to watch every penny.  You don’t have to know how to use Quickbooks.  Brilliant.  If you have success, I would love to hear your stories.

For many, this strategy isn’t working, either right now or ever.  Those folks need to watch where their money is going.  I’ve long believed the trick to getting started, leave alone getting it right, is to make it easy and fun.  I think I might have found it.  Now, I stick to my inclination not to work with folks on budgeting, bail-outs and bad attitudes, but I’m always willing to share strategies that work.

Think of your money in three buckets—static, discretionary, and future

I will start with an admission:  I don’t actually budget the way I’m about to describe.  I’m stealing this idea from a Financial Planning Association conference I just attended (my whole life is continuing education).  I’m one of those freaky people that keeps track of just about every expenditure, tracks it in Quickbooks with help of my assistant, and analyzes where money is being spent, where it can be saved, etc.  Most people won’t do this, so I rarely, if ever, recommend it. 

What I like about this idea is that it’s easy and fun.  This step should take no more than an hour.  Here’s what you do:

1. Get out the last six months’ worth of statements that contain your expenses (checking, credit cards, etc.).  Six months is required for homeowners, in particular, so it catches semi-annual expenses.  You might want to add other annual expenses.
    
2. Add up all the expenditures and withdraws (ATM withdraws included). Divide by 6.  This is what you’re spending per month.
    
3. Now, go through those statements and identify all your “static” expenses – that is, those that happen every month as a result of passed decisions you have made.  Those expenses include the mortgage(s), property taxes, insurances, car payments, utilities, other loan payments (including credit card interest), childcare expenses (not random babysitting), etc.  Add them up.
    
4. Everything else is discretionary.  Subtract “static” from total expenses.  Remember to keep your timeframe to monthly numbers.  That’s your discretionary budget.  Divide by 4.5 (or so).  That’s your weekly discretionary budget.
    
5. Now sit down and decide what you want or need to save for.  These things could be a kitchen remodel or new clothes or a vacation.  Some folks will add to this quarterly tax payments or annual payments like life insurance premiums.

Here’s what you’ve done.  You’ve gotten a clear picture of how much money you are spending as a result of passed decisions.  That’s your static bucket.  You’ve gotten a clearer picture of what you’re spending week-to-week on food, clothes, household goods, extra babysitting, pet expenses, etc.  You’ve gotten clear about what you want to do with your money. This may take some tweaking along the way, but you’re on your way.  See next week’s post on what to do next.

I had to laugh the other day, though, when a post requested a referral to a financial planner who “could explain all the options for paying for college that people use.”  This person wanted unbiased advice and essentially the a la carte menu of possibilities. That would be a little like me walking into the paint store and saying, “I just want to see all the colors people use to paint their walls.”  Have you ever seen how many colors there are, how many different shades of the same color, and how many brands of paints?  That’s before you get to oil or acrylic.  Don’t get me started on brushes. And have you ever taken a sample of favorite paint home from the store, put it on the wall and hated it?  This original poster would have been better off with a survey.

Your advisor should advise YOU.

Here are the many ways I’ve seen college get funded:

• Kid decides not to go to college or not to go right away.
• Kid decides to live at home and attend two-year college.
• 529 plans.
• Paying out of income as the child goes to college.  In other words, not using savings at all.  (Heck, in one instance, the family’s annual tuition expense went down when the kid left a private high school and went to a state university and the family bought a new car.)
• Brokerage and investment accounts.
• Grandparents or other family members paid for it.
• Scholarships.
• Work-study programs.
• Loans.  (Remember, you can borrow for education but not retirement)
• Life insurance cash values.
• Investment properties (either selling them or using rental income).
• Inheritances and inheritance advances.

I could go on.  My point is that there is no right way to do this, you need someone who can listen to you, understand your values and know who you are, and help you navigate among the many options with a presentation of the beauties and pitfalls of each. That’s what good advisors do:  they listen well, they have opinions, they articulate them, and help their clients come to their own decisions about their financial lives.  This is why good advice is worth it.  It saves you time, money, anguish and agony.  A strategy for college funding is not always easy to just paint over.  Make sure you get as good of a look as you can at the start.

Remember that taxes do good things and you do have choices

First, breathe.  Lighten up.  We’ve all been there in one year or another.  Find gratitude.  The taxes you pay do good things – libraries, schools, roads, people to fix the roads, street lights, police, courts, and the list goes on.  These things may not be perfect, but for the most part, they’re functional.

Second, remember that you have choices.  Here’s something else a bunch of you did this tax season:  You funded your qualified retirement plans.  When you looked at the difference in your tax bill based on whether you funded that plan or not, it felt like a no-brainer to fund it.  You thought, “Look at all the money I saved in taxes!”  You probably thought with pride, “I put money away for retirement just like I’m supposed to and look at how much I put away!”

If you had these thoughts, I want you to contemplate these thoughts:  (1) If you believe taxes are going to remain the same or go down for you in retirement, it makes sense to fund qualified plans.  But if you believe taxes are going up, you’ve just “kicked the can down the road,” when taxes in retirement will likely be much higher.  Did you really save money?  Frankly, taxes are on sale right now.  (2) You may have been better off funding a tax-free retirement with after-tax dollars, rather than a qualified plan, so that when you go to retire, you’ll have fewer taxes to pay, less fear about tax deadlines, and a simplified tax return.  Starts to make retirement look even better, doesn’t it?  Remember that you have choices about how you earn, invest, and spend your money.

What to eliminate from 31 ideas and what to add

There’s an older article that refers to 31 ideas. I see no reason to replicate it.  Check it out.  There are some great suggestions.

 
Here’s what I would not do (or at least be wary of):

• Make an extra mortgage payment.  This is only worthwhile if you’ve sat down with your financial planner and decided this is actually in your best interests.  It likely isn’t.

• Increase your student loan payment.  Again, only worthwhile if you’ve considered the interest rate, whether you can deduct the interest, and whether it makes sense in your overall financial plan.  Remember, paying off debts is not the same as accumulating assets.

• Seeking a lower interest credit card.  Initiating new credit can bring down your credit score, so if you’re planning to buy a house, this could be a bad idea.  Otherwise, it’s a great idea.

• Be careful about shopping for new home and auto policies.  Make sure that you’re not losing “seniority” at your insurer that you would be giving up should you change companies.

 
Here’s what I applaud and highly recommend:

• Set an automated payment toward your debt.  In this, I’m thinking about the minimum monthly payments.  Make sure those are paid automatically.  Now, you might always pay more or pay them off, but I can’t tell you how many clients thought they were paying ABC Bank for their mortgage but sent the payment to the credit card division and didn’t catch the mistake until they were 30 days late.  Yikes.

• Check your credit report.

• Reread your estate planning documents. Make sure you still agree with them.

• Walk a loved one through your affairs. 

 
Here’s what I would add:

• Call your mortgage broker and see if you can do better on your residential loans.

• See the comment near “Investments and Retirement” about checking out your medical report file from the nationwide consumer reporting agencies.  Like checking your credit report, you may discover mistakes that are causing you money.

• Consider buying long-term care insurance.

 
If we can help you with any of these items or with a referral, please call.

As home loans get harder to obtain, the number of renters increases, and so will rent

Come October 2011, buyers’ purchasing power is will reduce even further:

• The FNMA (Fannie Mae) loan limit will be reduced from $729,000 to $625,500, pushing more buyers into jumbo loans for which there are fewer lenders and consolidators.

• Jumbo loans require 6-12 months of reserves, which is more than FNMA requires.

• Interest rates will likely rise, making qualifying for a loan even harder.

• Mortgage insurance for FHA loans will increase by 30% in April 2011.

• Credit scores are on the decline.

• As home equity has vanished, buyers who want bigger homes will not have the equity from the sale of their current home to put toward the new purchase, which will likely require a 30% down payment.

What does this means?  More people staying in their homes, more people unable to qualify for a loan, more people renting instead of buying.  This is all true before we get to the conversation of the recurring suggestions in Congress that the mortgage interest deduction should be reduced or eliminated.  There are times when it’s good to be a landlord. This is one of them.  And, yes, we do investment property loans, too.  Give us a call.

Getting scarce loans will now be scarier

Kathleen Pender, in the San Francisco Chronicle, wrote last Sunday that “tougher rules mean loans could become more scare (sic), more expensive or both.” I just had to love the typo.  Scary, scarce, and costly – just what the consumer wants in a mortgage, just what the consumer needs to have confidence in the lending industry.  Uh, I don’t think so.

Here’s what’s happening: 

• • FHA mortgage insurance premiums are going up to bolster FHA’s capital reserves.  This could mean an extra $63/month on a $300K loan.
   
• • Loan limits for FHA and Fannie and Freddie loans will drop to $625,500 on October 1.
   
• • Fannie/Freddie fees to lenders will increase, a fee that will be passed along to consumers.  On a $300K loan, this would amount to $750 to $1500.
   
• • Starting April 1, either the lender can pay a set fee to the broker for brokering the loan or consumers can pay the broker directly, but not both. If consumers couldn’t understand compensation or comparing lenders and loans before, they aren’t going to have it any easier.  And anyone with a loan amount of $300K or less will likely be less well-served going forward. They often need the most help.
   
• • Lenders who securitize loans will have to retain a 5% interest in the portfolio they securitize. That means less money to lend.
   
• • As always, the wealthy don’t have to participate:  There are lenders out there now who will lend money to a borrower who is willing to put money into an account with this lender equal to the loan amount, and not require the borrower to make a mortgage payment. For 10 years.  So, if you’re wealthy and your income is lousy due to the economy, but you have the assets, the rules don’t apply to you.  This is the epitome of the saying, “lenders only lend to those who don’t need the money.”  We’ve come full circle. 

 

Until the secondary mortgage market improves for lenders willing to do loans that are not sold to Fannie and Freddie, the number of loans available and the ease of finding them is going to get worse. If you want a good loan, you might think about getting it now.