Inherited Property With Back Taxes

How California's Property Tax Delinquency Timeline Works

A tax sale does not follow quickly after a missed payment. When a bill goes unpaid past its due date, the property becomes "tax defaulted," and penalties and interest begin to build. The current rates are set out by the county tax collector.

Under Rev. & Tax. Code section 3691, five years or more after a property becomes tax defaulted, the tax collector has the power to sell, and shall attempt to sell, property that has not been redeemed, unless other law makes it not subject to sale. The same section shortens that period to three years or more for nonresidential commercial property, although a county may choose by ordinance or resolution to apply the five-year period to that property instead. It also allows a sale three years or more after default when a city, county, nonprofit organization or holder of a recorded nuisance abatement lien makes the request the section describes. If a declared disaster damaged the property and the damage has not been substantially repaired, the five-year period is tolled until five years have passed from the date of the damage. Section 3691 also requires the tax collector to give notice before an intended sale.

Redemption means paying off the default to clear it. Under Rev. & Tax. Code section 4101, tax-defaulted property "may be redeemed until the right of redemption is terminated." Rev. & Tax. Code section 4217 also lets a person elect to pay delinquent taxes in installments at any time before 5 p.m. on the last business day before the tax collector obtains the power to sell, and the county may charge a processing fee for it. If an installment plan defaults, it generally cannot be restarted on the same terms.

The exact payoff changes as interest accrues, so the figure comes from the county tax collector's office on the day it is requested.

Who Has Authority to Pay or Resolve the Back Taxes

Anyone can write a check, but resolving the taxes as part of a sale takes someone with legal authority over the property. Who that is depends on how the property passed at death.

A probate estate. Under Probate Code section 8400, a person has no power to administer the estate until the court appoints them personal representative and letters are issued. The personal representative is the court-appointed person who manages the estate. Letters are the court document that proves that appointment. This applies whether or not the person is named executor in the will, except that a named executor may pay funeral expenses and take necessary measures to maintain and preserve the estate before letters issue. When no executor serves, the court appoints an administrator, who receives letters in the same way.

A trust. A successor trustee's authority comes from the trust document itself rather than from a court appointment. A title company and the tax collector usually ask for a copy of the trust or a trustee's certification.

Direct title. Under Probate Code section 5652, a transfer on death deed passes the owner's interest to the named beneficiary at death. That transfer is subject to any lien of record, which includes a recorded tax lien, and two or more beneficiaries take the property as tenants in common in equal shares. Smaller estates may also pass through the petition to determine succession to the decedent's primary residence or the affidavit for real property of small value. Each has its own value limits and waiting periods in the Probate Code.

When co-heirs disagree about whether to pay or sell, that becomes a contested matter, and it is handled by an attorney who litigates trust and probate cases.

Property Tax Reassessment and Proposition 19

Back taxes are about the past. Reassessment is about what the tax bill becomes after the transfer. Under California's Proposition 13 system, property is generally reassessed to current market value when ownership changes. Proposition 19 narrowed the parent-child exclusion from that reassessment, and for transfers on or after February 16, 2021, the rule is Rev. & Tax. Code section 63.2.

Under section 63.2, a transfer between parents and children, or between grandparents and grandchildren if all of the grandchild's parents who are the grandparents' children have died, is excluded from reassessment only on these conditions:

• It must be a principal residence. The property must have been the transferor's principal residence and become the transferee's principal residence within one year of the transfer.
• An exemption must be filed. The transferee must file for the homeowners' or disabled veterans' exemption within a year of the transfer.
• A claim must be filed with the assessor. The claim is due within three years after the transfer, or before the property is transferred to a third party or the transferee stops living there, whichever is earlier. Separately, a claim also counts as timely if it is filed within six months after a notice of supplemental or escape assessment is mailed.

A family farm can also qualify under its own terms. A home that does not become the child's or grandchild's principal residence is reassessed to current value.

Even when the exclusion applies, there is a value limit. Any market value above the prior taxable value plus an adjusted amount is added to the new assessed value. The county assessor and the State Board of Equalization publish the current figure and the claim form, which the State Board of Equalization prescribes.

Reassessment and back taxes can exist at the same time. Whether a claim fits a particular family is a question for the county assessor's office.

The Stepped-Up Basis and What It Means When the Property Is Sold

Federal income tax on a sale turns on "basis," which is the starting value used to measure gain. Under 26 U.S.C. § 1014(a), the basis of property acquired from a decedent is generally:

• the fair market value at the date of death;
• the value on the alternate valuation date, if that election is made under section 2032;
• the value determined under section 2032A, if that election is made; or
• the decedent's own basis, to the extent the exclusion in section 2031(c) applies.

Because the starting point is usually the date-of-death value rather than what the parent paid, the basis is often called "stepped up" when the home was worth more than the parent's cost. It is "stepped down" when the home was worth less. The basis is fixed by the alternative that applies. A change in the home's value after the death does not change the basis itself.

Capital gain is generally the sale price less that basis, after allowable adjustments. A sale close to the date-of-death value may produce little or no gain. Paying back taxes from the sale is a separate matter from the basis calculation, and so is Proposition 19 reassessment, which is a state property tax rule that has nothing to do with federal income tax. A CPA, an enrolled agent or a tax attorney can review how basis and any gain work out for a specific estate or heir.

Options for Heirs Facing Back Taxes on an Inherited Property

Families in this position usually choose among three paths. Comparing them on paper often helps when siblings are deciding together from different places.

Redeem and keep. The person with authority pays all delinquent taxes, penalties and costs, using the amount the county tax collector provides, and the property stays in the family. An installment plan is a variation on this path.

Sell and pay from escrow. The lien is paid at closing from the sale proceeds. There are three ways to sell. A listing with a licensed real estate agent exposes the home to the open market, which can bring more buyers and competing offers, but it usually involves preparation, showings, a commission and a buyer who may depend on a loan. A sale by the owner without an agent avoids a listing commission, but it leaves pricing, marketing, negotiation and paperwork to the family.

A direct sale to a buyer who pays cash and takes the house in its present condition is the third way. A direct offer is often lower than what an open-market sale might bring, because that buyer takes on the repairs, the risk and the cost of reselling. What the seller gives up in price buys less preparation, fewer showings and less dependence on a buyer's financing. An inherited house that needs repairs can be sold in its present condition, and any disclosure duties still apply.

The tax lien gets paid in every one of these sales. No method of selling avoids it.

Comparing written offers and estimated net proceeds is how a family tells which way fits. Net proceeds are the price less commissions, repairs, carrying costs, loan payoffs and closing costs, including the tax payoff. A side-by-side look at a cash offer vs listing can make those differences concrete.

When the house is in probate, Probate Code section 10308 generally requires a sale of estate real property to be reported to and confirmed by the court before title passes. The exception is a sale made under the authority described in Probate Code section 10503, which depends on what authority the court granted. The estate's attorney can say which applies, and the steps for selling during probate follow from that answer.

Disclosures a Seller of Inherited Property Still Owes

Selling an inherited house does not end the question of disclosure, although it can change which forms apply. California's transfer disclosure statement is the standard written report a seller gives about a home's condition, and it comes from an article of the Civil Code. Civil Code section 1102.2 lists sales that article does not cover, including sales by a fiduciary in the course of administering a trust or a decedent's estate, and sales under court order, such as sales ordered by a probate court in administering an estate. The fiduciary exemption does not apply when the trustee is a natural person who is trustee of a revocable trust and is a former owner of the property, or who lived in it within the preceding year.

An exemption from that one form leaves other duties in place. Disclosure rules found elsewhere in the law, which can include rules about natural hazards or lead-based paint in older homes, may still apply. An heir who never lived in the house can disclose only what they actually know, but knowing little does not erase every duty.

The estate's or the trust's attorney and a licensed real estate professional can say which disclosures a specific sale requires.