Inherited House With a Mortgage

The Due-on-Sale Clause and the Garn–St. Germain Act

Most home loans carry a due-on-sale clause. Under 12 U.S.C. § 1701j-3, that is a contract term that lets the lender demand the full balance if the property is transferred without its written consent. Federal law generally lets lenders enforce these clauses.

12 U.S.C. § 1701j-3(d) makes exceptions for loans on residential property with fewer than five dwelling units. Among them, 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
• "a transfer to a relative resulting from the death of a borrower"
• "a transfer where the spouse or children of the borrower become an owner of the property"

The full subsection lists other transfers as well.

In practice, an heir who is a relative generally does not have to refinance just to keep the existing loan in place after the death. The protection does not pause the loan, though. Its terms, including the payment schedule, still apply.

This protection is not the same as an assumption. In an assumption, the lender agrees to put the loan in the heir's name, possibly on new terms. Under the federal rule, the lender simply cannot call the loan due because of the inheritance transfer alone.

Reverse Mortgages: A Different Set of Rules

A reverse mortgage, usually a federally insured Home Equity Conversion Mortgage (HECM), runs almost the opposite way. It typically requires no monthly payments while the borrower lives in the home. Instead, the balance becomes due when the borrower dies.

The heirs have a limited period to resolve the loan, by selling, refinancing or paying the balance. The loan documents and the servicer's written notices set that period. This page gives no number because it depends on those papers. Whether anyone owes a shortfall when the home is worth less than the balance also depends on the loan's terms and the program's rules, so the servicer's written statement is the place to confirm it.

A sale is a common way to resolve a reverse mortgage. Escrow pays the balance from the sale price, and any remainder goes to the estate or the heirs. The same payoff demand under Civil Code section 2943 described above gives a written balance. Asking the servicer in writing for the deadline gives the family a date to plan around.

How the Stepped-Up Basis Affects a Sale

Under 26 U.S.C. § 1014(a), "basis," the starting figure for measuring gain or loss on a sale, is generally the house's fair market value at the date of death. The statute gives three alternatives:

• the value at the alternate valuation date, if an election under section 2032 is made
• the value determined under section 2032A, if that election is made
• the decedent's own basis, to the extent the section 2031(c) exclusion applies

Because gain is measured from that date-of-death value, growth in value during the parent's lifetime is generally not part of the gain when the heir sells. Whether a sale shows a gain or a loss depends on the sale price compared with that basis, not on what the parent originally paid.

The mortgage does not enter this figure. Basis is the value of the house, not the equity left after the loan. A house with a large balance has the same basis as the same house owned free and clear.

A CPA, an enrolled agent or a tax attorney reviews basis and any gain or loss for a particular estate. The related tax questions before selling, such as withholding at closing, belong in that same conversation.

Selling the Property: How the Mortgage Gets Paid Off

At closing, the escrow or title company uses the payoff statement to pay the lender directly from the sale price. The loan, closing costs and other liens come out first. What remains goes to the estate or the owners. The person signing the grant deed needs authority to sell. Who holds that authority depends on how title was held and whether probate, a trust or a simplified court procedure governs.

The ways to sell carry real tradeoffs:

• A listing with a licensed agent puts the house in front of the open market and often reaches the most buyers. It brings commissions, preparation and showings, and the sale may depend on a buyer's loan.
• A sale by the owner without an agent saves a listing commission. In exchange, the seller handles pricing, marketing, contracts and buyers. Selling inherited property without a realtor covers that path.
• A direct sale to a cash buyer lets the house be sold in its present condition. A direct offer is often lower than an open-market price, because that buyer absorbs the repairs, the risk and the cost of reselling. What the seller gains is less preparation, fewer showings and less reliance on a buyer's financing.

None of these paths changes the estate's authority, a court's steps, a lien or a tax.

On disclosures, Civil Code section 1102.2 lists sales the disclosure article it belongs to does not apply to. The list includes sales ordered by a probate court and sales by a fiduciary in the course of administering a trust or a decedent's estate. The fiduciary exemption does not apply where the trustee is a natural person who is a trustee of a revocable trust and is a former owner of the property, or was an occupant in possession within the preceding year. To sell an inherited house as-is, the family still needs to know which duties remain.

Comparing written offers by 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. A guide to comparing offers on an inherited house walks through that comparison.

When Probate Governs the Sale

A house that was in the parent's name alone, with no trust or transfer on death deed, typically goes through probate before it can be sold. The California Courts' guide to property after someone dies explains that a judge appoints a personal representative, the person responsible for representing the estate. That is an executor if named in the will, or an administrator if not.

Heirs do not hold the power to sell individually. Under Probate Code section 8400, no one may administer the estate until appointed and letters issue. Before that, a named executor may pay funeral expenses and take necessary steps to maintain and preserve the estate.

Under Probate Code section 10308, sales of estate real property are generally reported to and confirmed by the court before title passes. If the personal representative does not file for confirmation within 30 days after the sale, the buyer may. The exception is a sale made under authority granted by the Independent Administration of Estates Act. Under Probate Code section 10503, the court-confirmation requirements, such as published notice of sale, court approval of commissions, the appraised-value rule and the court's examination of the sale, do not apply to a sale made with that authority.

Whether a court must confirm a particular sale depends on the authority the court granted and on whether anyone objects to the notice of proposed action the Act uses. The estate's attorney can say which applies.

Two simplified procedures can shorten the route to title. The petition to determine succession to the decedent's primary residence, under Probate Code section 13151, is available once 40 days have passed after the death, for a residence under a value limit that is adjusted periodically. The affidavit for real property of small value, under Probate Code section 13200, may be filed no sooner than six months after the death.

When the house is held in a trust, the successor trustee holds the authority to sell under the trust document, not the probate court. If the family is in conflict, a contested matter is a separate subject for an attorney who litigates trust and probate cases.

Throughout, interest keeps accruing. The Judicial Council's form DE-147, Duties and Liabilities of Personal Representative, says the representative must keep complete and accurate records of each financial transaction affecting the estate, and should maintain appropriate insurance in force during the entire period of the administration. Mortgage payments are part of that accounting.

California Property Tax and Proposition 19

Many families wonder whether the parent's low tax bill can carry over. Inheriting a house is generally a change in ownership, which leads to reassessment. Form DE-147 says that when the inventory is filed, the personal representative also files a change of ownership statement with the county recorder or assessor where the property sits.

For transfers on or after February 16, 2021, Rev. & Tax. Code section 63.2 excludes a parent-to-child transfer, or a grandparent-to-grandchild transfer where the grandchild's parents have died, from reassessment in whole or in part. The house must have been the parent's principal residence and must become the child's principal residence within one year. The child must also file for the homeowners' or disabled veterans' exemption within a year of the transfer.

The exclusion is also limited by value. When the market value exceeds the prior taxable value by more than an amount the statute sets, the excess is added to the taxable value. The county assessor's office publishes the current figure.

A claim goes to the assessor within three years after the transfer, before a transfer to a third party, or before the heir stops living there, whichever comes first. A claim also counts as timely if filed within six months after a supplemental or escape assessment notice is mailed. A later claim, made while the house has not been sold to a third party, applies from the lien date of the year it is filed.

An heir who sells rather than moves in usually will not meet the residence condition. A sale to a buyer is also a new change in ownership of its own.

The county assessor's office answers reassessment and exclusion questions. A CPA, an enrolled agent or a tax attorney answers income-tax questions.