Inherited Property With Liens

Common Types of Liens on California Inherited Property

The deed of trust securing a mortgage is the lien heirs find most often. In California, a home loan is usually secured by a deed of trust, which gives the lender a security interest in the house. The loan balance is still owed no matter who inherits.

Many loans contain a due-on-sale clause, a term that lets the lender call the whole loan due if the property is transferred. Federal law limits that clause for inherited homes. For a loan on residential property with fewer than five dwelling units, 12 U.S.C. § 1701j-3(d) says a lender may not exercise the clause upon "a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety," upon "a transfer to a relative resulting from the death of a borrower," or upon "a transfer where the spouse or children of the borrower become an owner of the property," among the other transfers that subsection lists. The inheritance alone does not let the lender call the loan, but the loan still has to be paid, and a sale pays it off.

Other liens an heir may find include:

• Property tax lien. Under Rev. & Tax. Code section 2187, every tax, penalty or interest on real property is a lien against the property assessed.
• Judgment lien. Under Code of Civil Procedure section 697.310, a judgment lien on real property is generally created by recording an abstract of a money judgment with the county recorder.
• Federal and state tax liens. The IRS and the California Franchise Tax Board may record liens for unpaid taxes.
• Mechanic's lien. A contractor or supplier who was not paid for work on the house may have recorded one.
• HOA lien. A homeowners association may record a lien for unpaid assessments.

A lien already on the house is also different from a creditor's claim against an heir's own share of the inheritance. A creditor of the heir may in some cases reach that share, but whether it can depends on the type of debt and how title passed. That question belongs with the estate's attorney.

Who Has Authority to Sell and Who Handles the Liens

How title passed decides who may sign. The possible routes include:

• A will, through probate. The executor sells.
• A living trust. The successor trustee sells.
• Joint tenancy or community property with right of survivorship. The surviving co-owner holds title.
• A transfer on death deed. The named beneficiary takes title.
• Intestate succession. When there is no will, the heirs the law names inherit, usually through probate.

The roles are distinct. An executor is the person named in a will to handle the estate. An administrator is the person the court appoints when there is no will or the named executor cannot act. The court's Guide to property after someone dies explains that the law sets an order of priority for appointment. Under the law, that order begins with a surviving spouse or domestic partner, then children, then grandchildren, then other descendants, then parents, then brothers and sisters, and continues through more distant relatives and others. A personal representative is the term that covers both an executor and an administrator. Neither may act until appointed: under Probate Code section 8400, a person has no power to administer the estate until appointed and issued letters, the court document that makes the appointment effective. A named executor may, before that, pay funeral expenses and take necessary steps to maintain and preserve the estate.

A successor trustee is the person the trust document names to manage trust property after the person who created the trust has died. Authority to sell comes from the trust's terms, not from probate.

Whoever holds authority to sell also signs the escrow instructions that pay the liens from the proceeds. When siblings co-own the house outright, a voluntary sale generally needs every owner's signature. Where co-owners cannot agree, California law provides a court process called partition, which can end shared ownership through a division or a sale. Where heirs are in an actual dispute, that is a contested matter for an attorney who litigates trust and probate cases.

How Liens Affect a Sale and What "Selling With a Lien" Means

Homes with liens are hard to sell only until the liens are dealt with. Most buyers, and every lender financing a buyer, want clear title, meaning ownership free of other people's recorded claims. A title company generally will not insure title over an unresolved lien.

The usual sequence runs like this:

1. Preliminary title report. Once escrow opens, the title company searches the county records and lists each recorded lien.
2. Payoff demands. Each lienholder states the amount needed to release its lien.
3. Escrow disbursement. At closing, escrow, a neutral holder of the money, pays each lienholder from the sale price.
4. Releases recorded. The title company records the reconveyance or release, and the buyer takes clear title.

So "selling with a lien" usually means the lien is paid through escrow at closing. The buyer receives clear title, and the seller receives what is left after the payoffs and closing costs.

When liens add up to more than the house is worth, the property is called underwater. The paths generally include negotiating a reduced payoff with a lienholder, a short sale, which is a sale for less than the debt that needs the lienholder's approval, or in some cases letting the lender foreclose. Each carries its own consequences for the estate, and the estate's attorney can explain them.

Liens also last for different lengths of time. A judgment lien, for example, continues until 10 years from the date the judgment was entered unless it is satisfied or released, subject to renewal of the judgment, under Code of Civil Procedure section 697.310. Tax liens and deed-of-trust liens follow their own rules.

Comparing written offers and estimated net proceeds is how a family tells which sale fits. Net proceeds are the price less lien payoffs, commissions, carrying costs and closing costs.

Liens and the Probate Process in California

A probate estate pays its debts before anything goes to the heirs. The court's Guide to property after someone dies describes the personal representative as the person who collects the property, pays the bills, and then distributes what remains. The probate division of the Superior Court in the county where the estate is administered oversees that work.

Unsecured creditors file claims with the estate within the period the Probate Code sets. A secured creditor has another route. Under Probate Code section 9391, a mortgage holder or other lienholder, including a judgment lienholder, may sue to enforce its lien against the property without first filing a claim, if its complaint expressly waives all recourse against other estate property. The personal representative may ask the court to stop that action.

When the estate sells a house that carries a lien, Probate Code section 10361 sets the order in which the sale money is applied:

1. Administration expenses reasonably related to the property sold.
2. The expenses of the sale.
3. Payment of the lien, if the terms of the sale require it.
4. Use in the rest of the administration.

The same section says the lien is paid without delay after those expenses, and the property generally stays subject to the lien until the money is actually applied.

Whether a court must approve the sale depends on the authority the court granted. Under Probate Code section 10308, a sale of estate real property generally must be reported to and confirmed by the court before title passes, except as provided in Probate Code section 10503. Under the Independent Administration of Estates Act, a personal representative who holds authority to sell may give heirs and beneficiaries a notice of proposed action, and if no one objects within the period the law sets, the sale can go forward without a hearing. Under Probate Code section 10503, the court-confirmation requirements, such as published notice of sale, court approval of agents' and brokers' commissions, the rule that the price be at least 90 percent of appraised value, and the court's examination of the sale, do not apply to a sale made with that authority. If the court granted only limited authority, or someone objects to the notice, the sale generally goes to court for confirmation. The steps of a probate sale in California apply whoever the buyer is.

The Judicial Council's DE-147 Duties and Liabilities of Personal Representative tells personal representatives to consult an attorney about the legal requirements for sales and mortgages of estate property.

Smaller estates may qualify for simplified procedures. These include the petition to determine succession to the decedent's primary residence under Probate Code section 13151, available once 40 days have passed since the death and only for a residence under a value limit that is adjusted periodically, and the affidavit for real property of small value under Probate Code section 13200, available no sooner than six months after the death. A lien stays on the house under either procedure.

Property Tax Liens, Reassessment, and the Proposition 19 Rules

Property tax is the lien a county itself holds. As noted above, unpaid tax, penalties and interest are a lien on the property, so an heir who takes title with delinquent taxes takes it subject to them, and they are paid to clear title, usually through escrow. The county tax collector's office states the current amount owed and explains what happens when taxes stay unpaid.

Reassessment is a separate question. A change in ownership usually lets the county reset a property's assessed value. Proposition 19 rewrote the parent-child exclusion from that reset. For transfers beginning on and after February 16, 2021, the exclusion is governed by Rev. & Tax. Code section 63.2.

Under Rev. & Tax. Code section 63.2, the exclusion covers a principal residence that passes between parents and children, or between grandparents and grandchildren when the grandchild's parents who were the grandparents' children have died. The home must become the heir's principal residence within one year of the transfer, and the heir must file for the homeowners' or disabled veterans' exemption within a year. The exclusion is also limited by a value test that compares the home's market value with its taxable value. The exclusion follows the heir's own occupancy, so a family that sells to an outside buyer is generally not keeping it in place.

A claim generally must be filed within three years after the transfer, or before the property is transferred to a third party, or before an eligible heir stops occupying it, whichever is earlier. A claim filed within six months after a notice of supplemental or escape assessment is treated as timely. The county assessor's office handles these claims and publishes the current figures.

The Stepped-Up Basis and Capital Gains on a Sale

Basis is the starting figure used to measure gain when property is sold. Under 26 U.S.C. § 1014(a), the basis of property acquired from a decedent is generally its fair market value at the date of death. The statute's alternatives are the value at the alternate valuation date if that election is made, a value determined under the special-use valuation election, and, to the extent a particular estate-tax exclusion applies, the decedent's own basis.

This is often called a stepped-up basis. Growth in value during the decedent's lifetime is generally not counted as gain when the heir sells. Gain is measured from the basis set under that statute to the sale price. A change in the market after the death does not change the basis.

A lien payoff lowers the cash the seller walks away with. It does not change the basis or the way gain is figured. A house sold with a large mortgage may leave little cash and still involve a gain or loss measured the same way.

People also ask about a "two-year rule" and how to avoid tax. The first usually refers to holding periods and tax rates, and inherited property has its own rules there. On the second, the stepped-up basis is the main thing that reduces taxable gain, and whether anything else applies depends on the facts of the sale. A CPA, an enrolled agent or a tax attorney reviews the income tax and basis questions for a specific sale.

Sale Options When the Property Has Liens

Every way of selling ends at the same escrow. Whether the house is listed, sold by the owner or sold directly, the liens are paid at closing, and the sale method does not change what is owed.

A direct buyer is paid for taking on repairs, risk and the cost of reselling, which is why its offer is often below what the open market might bring. What the family gets in return is a simpler path to closing day, not a smaller lien bill. A house can be sold in its present condition, and the tradeoffs of selling a house that needs repairs are the same whatever the liens. Silver Lining Inherited Property is one place a reader can get an offer on an inherited property for a direct as-is sale, and asking for one carries no obligation to sell. Weighing a cash offer or a listing comes down to comparing written offers and estimated net proceeds.

Disclosure rules depend on who is selling. Civil Code section 1102.2 says the transfer disclosure article it belongs to does not apply to certain sales, including court-ordered sales such as those ordered by a probate court, and sales by a fiduciary in the administration of a trust or a decedent's estate. The fiduciary exemption does not apply when the trustee is a natural person who is a trustee of a revocable trust and either is a former owner or occupied the property within the preceding year. The estate's or the trust's attorney can say which duties still apply.