Estate Inheritance w/ 2 Homes

[Brendan M Hornung]

Hello BP,

Someone I know recently inherited two homes through an estate inheritance. One property is rented with a tenant in place, and the home in Riverside, CA is the home of the person who passed. This post is regarding the Riverside, CA home. It is a 3/2, roughly 1750 sq ft, and on a small lot so there is no chance to build an ADU. The current mortgage is $1,000 per month at 3.8%. Rent is estimated at $3,000 per month and the home is roughly valued at $625,000. It was built in the late 1920s but in relatively good condition. Could use some cosmetic updates throughout and the rehab estimate would be about $40,000. Comps run about $650,000 - $675,000.

My questions to you: What is the best exit strategy? Would it be worth it to rehab if we sell it or rent it?

Option 1: Keep the home and rent it and cash flow about $2,000 per month while it appreciates.

Option 2: Sell the home and cash out.

Option 3: 1031 exchange the home into 4-6 units in Knoxville which would be about the same value.

More info: Riverside as you all know is a great appreciating market but not landlord-friendly being in CA. Knoxville is in the top 10% of appreciating markets with an average appreciation of about 9% per year. I also have heard that if you sell a home that is inherited through an estate you are not taxed. Is this true?

Thanks, BP fam!

[Rick Pozos]

It is not that you are not taxed on the inherited house, it is that you receive the house at today's value. So if you sell it tomorrow or in the next few months, the value is probably the same as 3 months ago when you inherited it. Hence, no profit, no tax.

It was worth $600k when inherited. Sold a couple of months later for $600k. No tax because there was no profit made.

[Dan H.]

Related to what @Rick Pozos indicated, you need to get a time of death (TOD) appraisal.   The baseline value will be the value at time of death.  All gains until time of death are gone within tax impact. 

Unless you are a child and moving into the property, it will get a property tax adjustment.   This is important because the discounted property tax is likely the only advantage of keeping it and that is only present if you move in.  I have no idea what current property tax is, but it will likely be just over $600/month when readjusted.  

1031 has no value because 1) with the rebaseline to TOD value, there is no gains to address 2) it was not an income property.  You cannot 1031 properties that do not have income such as deceased personal residence.  

Without the property tax discount, what is the advantage of keeping the property?   In general personal homes are not optimal rentals.  I think you could find a better rental.  

I would recommend keeping it on if you plan to move into it (ideally immediately so you can keep the prop tax discount)  or if it has sentimental value.   Otherwise I suggest you sell it.  

Good luck

[Alan Asriants]

Having a $1000/m payment in CA is a golden opportunity IMO.

Rehab it, rent is out and enjoy that 2k/m. thats some solid cash off of an inheritance...

Cali RE will always be Cali RE. 

Location, location, location 

[Nicholas Coulter]

@Brendan M Hornung what's the long term goal of this person? In my shoes I would want the stability of the cash flow and look to leverage as a long term rental through a PM.

Some folks want to cash out and reinvest the new found equity in a higher producing asset. 

On the rehab tho if you want to rent it out dont over upgrade. Renter finishes would be cheaper than the seller finishes.

[Nathan Gesner]

California can be a tough market, but it's also lucrative. On the other hand, you can produce a similar return (or better) by shifting the money to another market that is safer for landlords. If you have a solid plan to reinvest in Knoxville, that would be my recommendation.