The Guide to Selling Inherited Property in California

Are you considering selling a property you inherited in California? If so, you’re certainly not alone. In fact, according to a recent Charles Schwab survey, 70% of those who inherit a house from their parents will ultimately sell it.

There are several legitimate reasons for this, but regardless of the why, it’s the how that’s really the most important. This guide is designed to help make the process of selling an inherited home in California as simple and straightforward as possible.

Inherited Property Defined

The term inherited property refers to any asset that is transferred from a deceased person to their heirs or beneficiaries. This can include just about anything, from personal items that only have sentimental value to cash, vehicles, investments, and of course, real estate. 

In the state of California, inheriting property often involves probate, a legal process through which a court oversees the settlement of the deceased person’s estate. This process primarily focuses on the settlement of debts and the distribution of leftover assets to the appropriate parties.

To make selling inherited property in California quicker and easier, it’s important to understand the legal and financial implications that may arise.

Steps to Take When You Inherit Property in California

Initiate the Probate Process

The probate process in California is initiated by filing a petition with the circuit court. This must be done within 30 days of the decedent’s death. Unless specified in a will, the court will appoint an executor or administrator to manage the estate. This individual will identify and value assets, pay taxes and debts, and distribute what’s left to the rightful heirs.

Keep in mind that most documents filed in a probate court must be verified. In other words, they must be sworn or affirmed to be true “under penalty of perjury." You can find the required verification statement on Form MC-030.

Get the Property Assessed

Once the probate process has begun, the next step is assessing and assigning value to the inherited property. In the case of an inherited home in California, it’s important to get a professional appraisal as soon as possible. This will not only establish the property’s fair market value but will also determine the tax basis, which will come into play once the property is sold. (We’ll go over this in greater detail below.)

Get the Property Ready for Sale

Next, you’ll have to decide whether you want to sell the home As-Is or invest time and money into any repairs or renovations that may be needed to make it more marketable. 

In our experience, most people who inherit homes choose to sell them as quickly as possible. This allows them to limit the amount of time, effort, and money they’ll need to put into the property. A quick sale can also be more favorable from a tax standpoint (again, we’ll cover this more later).  

If you do happen to decide to fix the place up, bear in mind that you will also be on the hook for its financial upkeep until it is sold. This can be risky in the event of a market downturn.

Legal Aspects of Selling Inherited Property in California

Transfer of Ownership and Title

In California, the heir or designated beneficiary is required to provide proof of inheritance and complete an affidavit in order to have the title of the property officially transferred into their name. This usually happens during the probate process and is required before the property can be legally sold.

Clear Any Debts or Liens

When a property is passed down, it may still have some outstanding debts, such as a mortgage. There may also be certain liens on the property. You will need to settle these obligations before you can sell the property. Start by requesting a payoff statement from the mortgage lender and check with the city or county records office to determine whether there are any liens or unpaid property taxes. 

Disclosure 

California law mandates that sellers disclose, in writing, certain details about a home’s condition. The law provides a standard format and form, referred to as the Transfer Disclosure Statement (TDS). 

Specifically, it is required that the seller disclose any and all known defects or other problems that could impact the home’s value, including the condition of the plumbing, appliances, roof, and other structural elements.

Additional requirements include:

• Natural Hazard Disclosure: Reveals whether the property is located in an area prone to natural disasters. 
• Lead-Based Paint Disclosure: Acknowledges the presence of lead-based paint and related hazards. 
• Megan’s Law Disclosures: Informs buyers if the home is located in proximity to a registered sex offender. 
• Homeowners Association Disclosures: If the property is part of an HOA, you must provide relevant documents, including financial statements, as well as information about any pending legal actions. 
• Smoke Detector and Water Heater Compliance: Certifies that smoke detectors and water heaters comply with state law requirements.

Failure to disclose any of these things could result in serious legal consequences.  

Financial Implications of Selling Inherited Property in California

Taxes 

• Documentary Transfer Tax: A documentary transfer tax is a fee the local government charges when real estate ownership changes. In California, all counties assess the same tax rate, which is 0.11% of the property’s value (rounded up to the nearest $500). 
• Property Tax: Like any other real estate, inherited homes are subject to property tax. In California, property tax is calculated at a standard rate of 1% of the assessed value. Additional country-specific fees may be added as well.
• Estate Tax: While California does not impose estate taxes, the federal government may, depending on whether the value of the estate exceeds the current exemption limit. 
• Inheritance Tax: Only a few states impose an inheritance tax. Fortunately, California isn’t among them.
• Capital Gains Tax: This tax is assessed on how much the property has appreciated in value from the date of the original owner’s death to the date of the sale. For this reason, many choose to sell quickly so as to limit the amount of time the home will have to appreciate. Here’s more information on capital gains and inherited property.

Other Expenses

• Repairs/Renovations: If you decide to do any repairs or upgrades to the property before selling, you will be responsible for those expenses.
• Ongoing Upkeep: Until the property sells, the heir(s) must keep all bills and expenses up to date, including mortgage, utilities, property taxes, insurance, maintenance costs, etc.
• Real Estate Commissions: Real estate agents receive a certain percentage of the sale price to compensate them for their work. The amount may vary slightly, but it is typically around 5-6%. 
• Closing Costs: These costs cover the administrative tasks associated with selling a home, such as attorneys’ fees, recording fees, title insurance, etc. Closing costs typically run between 2-5% of the sale price.

Documents Required for Selling Inherited Property in California 

Before you can sell the property you’ve inherited, you’ll need to collect and prepare all the necessary paperwork. In California, this includes the following:

• Photo ID: First and foremost, you’ll need to provide documentation of your identity.
• Proof of Ownership: This document proves that you are now the rightful owner of the home. It’s typically provided at the conclusion of probate.
• Death Certificate: Many third parties involved in a home sale, such as title and mortgage companies, will require a copy of the deceased owner’s death certificate.
• Property Title Records: A clear title is required to sell an inherited home in California. This includes proof that the title has been transferred into your name, and that there are no outstanding liens on the property.
• Property Tax Records: You’ll also need to prove that all property taxes are up to date and that there are no tax liens on the property. 
• Seller Disclosures: As mentioned above, California mandates that all sellers complete and submit several written disclosures. 

Options for Selling Inherited Property in California

When it comes to selling an inherited home, there are several options available. The most common include:

For Sale by Owner (FSBO)

Your first option is to list and sell your home independently. Here are a few specific pros and cons to keep in mind.

Pros: 

• Save money by avoiding real estate agent commissions.
• Maintain more control over the process.

Cons:

• Selling a home on your own can be time-consuming and sometimes confusing.
• Lack of experience and access to market resources can lead to delays and potential mistakes.
• Tax and legal issues could arise.

Real Estate Agent

Another popular option for selling inherited property in California is to work with a real estate agent. Of course, this option also comes with its own benefits and downsides.

Pros:

• Real estate professionals have market experience and access to more resources.
• Seasoned agents are skilled in the art of negotiating for the best price.
• Agents know what paperwork and documentation are required to ensure compliance.

Cons:

• Commission and other real estate fees can add up.
• With an agent, you lose a certain degree of control over the process.
• Traditional home sales can take a long time, especially when the market isn’t favorable.

Cash Buyer / Real Estate Investor

The third option is to work with a cash buyer. These sales are typically much faster than traditional ones, but they do have their own advantages and disadvantages to consider.

Pros:

• No commissions to pay and, in some cases, no closing costs either.
• Established investors can complete a cash sale in as little as 7 days.
• You may have the option to sell the property As-Is, without having to invest time or money in repairs or renovations.

Cons:

• The cash offer you receive may be slightly below market.
• There typically isn’t as much room to negotiate.
• If not careful about choosing a reputable investor, there’s the potential for scams.

Special Considerations When Selling Inherited Property in California

Multiple Heirs

Inheriting a home on your own can be complicated enough without having to factor additional heirs into the mix. Things can get particularly complicated when one of the joint owners refuses to sign probate or decides they don’t want to sell.

In California, not all owners are required to agree in order to sell inherited property, but if one or more are refusing, you may need to get the courts involved through what’s known as a partition action. As you can imagine, this can make an already tense situation even worse.

Even if all owners agree to sell, determining how and when to do so can open up an entirely new can of worms. 

If you’re one of multiple beneficiaries and you are struggling to get everyone on the same page, you may want to consider enlisting the help and guidance of a mediator who is experienced in these types of cases.

Title Issues

A home can only be legally sold if it has a clear title. This means that ownership of the property must have been properly transferred and there can be no liens, disputes, or other encumbrances associated with it. 

People who inherit property often find themselves having to settle outstanding debts, negotiate with creditors, and deal with the headaches of liens and other legal concerns. 

If you’re struggling with a particularly complicated or confusing situation, it may be worth consulting with a real estate attorney. 

Poor Property Condition

Unfortunately, inheriting a property that’s in poor condition is quite common. This is often the case when the deceased owner was elderly or in failing health leading up to their death, rendering them unable to keep up with the home’s maintenance.

If the house you’ve inherited needs a lot of work, you could be looking at tens of thousands of dollars in expenses just to bring it up to sellable condition. And all of this would be out of your own pocket.

This is why many people who sell inherited property in California choose to do so through a cash buyer. While the sale price might be slightly lower than market value, there’s also no upfront outlay of money. 

Some real estate investors will even buy the property with all the furniture and belongings still inside. This approach is especially appealing in hoarding situations, as it allows the seller to leave with cash on the spot, while the buyer handles the entire cleanup process.

Avoiding Probate Court in California

As mentioned, most inherited properties in California end up going through probate, which takes time and can be costly. Fortunately, there are a few ways to avoid this:

• Establish a Living Trust: Placing assets in a revocable living trust bypasses the probate process and transfers the property directly to the rightful heir upon the owner’s death.
• Set up Joint Ownership with Right of Survivorship: Joint Tenants with Right of Survivorship (JTWROS) is a legal arrangement through which the surviving owner(s) automatically inherit your share of the property upon your death, without it having to pass through probate.
• Gift the Property: In California, a homeowner can gift their property to someone, which essentially transfers ownership of the property to another person. It should be noted that there are lot of legal and tax considerations with this type of transaction.
• Record a Transfer on Death Deed: A Transfer on Death Deed (TODD) allows the property owner to directly transfer ownership of the home upon their death without the need for probate. All owners must fill out their own TODD. This means that a married couple must fill out and record two separate TODDs.

Most of these things will need to be set up and/or completed prior to one’s death. If you are in the process of planning your estate and are considering one of the above avenues to help your heirs avoid probate, we strongly recommend consulting with an experienced estate attorney and/or a qualified financial advisor.