Math on inheriting your parents’ California home has totally changed

This is especially true in California, where a proposition that went into effect in 2021 has dramatically changed the inheritance math, with one estate attorney calling it the “worst thing to happen in inheritance law in California in decades.”

So in California and the Bay Area, what options do you have if you inherit a home, or are planning to pass property on to your children? What factors should you consider before deciding to live in the home, rent it out or sell it?

Welcome to Hella Expensive, a column that’s aimed at helping readers navigate the financial aspects of living in the Bay Area. In each column, I’ll present a topic that impacts your bank account and financi.al future: homeownership and renting, the path to retirement, and how to manage your money in this infamously expensive region. Send your financial questions and concerns to me through the survey below, or email me at kellie.hwang@sfchronicle.com.

The positives of inheriting a home — and keeping it

If your parents left you their home, it can seem like a jackpot in the expensive Bay Area. Keeping a family home can also be very meaningful, especially after the difficulty of losing a parent.

“There’s a lot of sentimental value in inheriting a home,” said San Francisco estate planning and probate attorney Elizabeth Button. “ ‘We grew up here, we don’t want to get rid of it.’ It would be like saying goodbye to a family member all over again.”

Emotional attachment is a major driver for some of Button’s clients, some of whom have even taken second jobs to afford the costs of keeping the family home, she said.

For those who choose to sell, the inherited property comes with a built-in capital-gains tax perk, experts said.

“If you are planning to sell the property, there should be minimal [capital gains] taxes since the value of the home gets ‘stepped up’ or moved up to the fair market value at the time of death, freeing the inheritor from capital gains taxes in most cases,” said Ariana Alisjahbana, lead adviser with North Berkeley Wealth Management.

The challenges

But if there’s still a mortgage on the property, or major renovations or repairs are needed, that can be a big financial burden for inheritors. In the Bay Area, “a lot of people are house rich and cash poor,” Button said, which means they don’t have a lot of extra money to put into upkeep or new loan payments.

In addition, the family home often is left to multiple siblings equally, which can lead to disagreements about what to do with the property. 

“If three siblings inherit a $1.5 million house from their parents, and only one of them wants to keep it, she will have to buy out the other siblings’ share for $1 million, which reflects the high cost of housing in the Bay Area,” Alisjahbana said. “It’s often not possible to buy out the siblings’ shares, so in this situation it’s common to sell the house.”

Another reason to sell can be that the inheritors have already made a life in another city or state, and don’t plan to relocate.

“Renting the home out is an option, but not everyone is interested in becoming a landlord and managing a rental property,” Alisjahbana said.

In order to transfer or inherit a property after a loved one dies, you usually have to go to probate court. It’s a lengthy and costly process and cases can take anywhere from nine to 18 months. 

For those passing down property to their children, legal experts recommend meeting with an estate planning lawyer and setting up a living trust. This can help your children bypass probate court, or at least shorten the probate process. 

How California’s…