Inheriting real estate, especially in the high-cost region of the Bay Area, can feel like hitting the jackpot. The decision to keep such a property carries profound emotional weight, particularly after a parent’s passing.

There’s a financial silver lining for those contemplating selling, such as the capital gains tax advantage inheritors enjoy. Thanks to the ‘step-up’ in basis, where the property’s value is adjusted to its fair market value at the time of the original owner’s death, many inheritors face little to no capital gains tax should they choose to sell.

However, keeping an inherited property isn’t without its challenges. Mortgage responsibilities, management obligations, necessary renovations, or repairs pose significant time and financial strains, particularly in a market like the Bay Area, where liquid assets may be scarce. Additionally, properties left to multiple heirs can create logistical and emotional conflicts, particularly if one wishes to retain the property while others advocate for a sale—a scenario further complicated by the high costs of buying out siblings’ shares.

The introduction of California’s Proposition 19 has added another layer of complexity to inheriting properties by altering the tax benefits on property transfers between parents and children. The legislation reflects adjustments to historical tax laws that provided substantial relief to those inheriting property, now presenting a potential increase in property tax burdens for new inheritors due to reassessment at the time of death, ultimately increasing the operating expenses and minimizing the net operating income. This shift underscores the importance of strategic estate planning, with experts to mitigate Proposition 19’s procedural and financial impacts on the heirs.

There are many strategies Bay Area property owners can implement before their heirs inherit real estate to mitigate the challenges associated with inheriting real estate. Utilizing the 1031 Exchange helps investment real estate owners defer their capital gains tax and can provide a timely opportunity to set up their real estate to establish a new basis so the heir’s tax burden won’t be as impactful or even allocate assets to minimize conflict between heirs.

Reach out to build a plan for your real estate that meets your goals — now and later.