Inherited Property With Tenants

California Tenant Protections That Follow the Property

A tenancy survives the death of the owner. A tenant with a fixed-term lease can generally remain through its term, and a month-to-month tenant keeps the same terms until the tenancy is lawfully ended. Inheriting the property does not reset any of that.

The new owner also picks up paperwork duties. Under Civil Code section 1962, a successor owner or manager must give tenants current information, including who manages the property, who accepts legal notices and where rent is paid, within 15 days of succeeding the previous owner. A successor who has not complied cannot evict for nonpayment of rent that accrued during the noncompliance, though the tenant still owes the rent.

The larger rule is the Tenant Protection Act of 2019, often called AB 1482. Under Civil Code section 1946.2, once a tenant has continuously and lawfully occupied a covered residential property for 12 months, the owner may not end the tenancy without just cause, stated in the written notice. Special conditions apply when additional adult tenants join the lease before an existing tenant reaches 24 months.

Just cause comes in two kinds. At-fault just cause includes nonpaying rent, breaching a material lease term, nuisance, waste and criminal activity, and that list continues. No-fault just cause includes an owner's intent to occupy, discussed below, and the statute's list continues beyond it. A sale alone is not one of the listed grounds.

Not every property is covered. The companion rent-cap statute, Civil Code section 1947.12, lists exempt properties, including housing with a certificate of occupancy issued within the previous 15 years (unless it is a mobilehome) and a home that can be sold separately from any other unit, such as a single-family house or condominium, when the owner is not a real estate investment trust, a corporation or an LLC with a corporate member and the tenants received the statute's written exemption notice. That notice states the property is also not subject to the just-cause requirements of Civil Code section 1946.2.

Cities can go further. Los Angeles, San Francisco, Oakland and San Jose are examples of California cities with their own rent or eviction rules, which can apply even where state law does not. The city or county housing office states what its local rules require.

Notice Requirements When Selling a Tenant-Occupied Property

Selling does not require the tenants to leave. A property can be listed, shown and sold with the tenancy in place, so a notice of entry and a notice to terminate are two different things.

Showings. Civil Code section 1954 lets a landlord enter a dwelling only in listed cases, which include an emergency and showing the unit to prospective or actual purchasers. That section also sets the notice and timing conditions for entry, and a seller's agent or attorney can say how they apply.

Ending a month-to-month tenancy. Where a termination is otherwise permitted, Civil Code section 1946.1 requires an owner to give at least 60 days' notice, or at least 30 days if the tenant has lived there less than one year. The notice is served as the Code of Civil Procedure prescribes or by certified or registered mail, and it must include the statute's language about reclaiming abandoned property.

A sale to a buyer who will live there. The same section allows 30 days' notice, rather than 60, only when all of these apply: the unit can be sold separately from any other dwelling; the owner has contracted to sell to a good-faith buyer and opened escrow with a title insurer, underwritten title company, licensed escrow agent or licensed broker; the buyer is a natural person; notice is given no more than 120 days after escrow opens; no earlier notice under that section was given; and the buyer in good faith intends to live there for at least one full year after the tenancy ends.

Covered tenancies. Where Civil Code section 1946.2 applies, notice alone is not enough: a just-cause ground is also needed. The owner-move-in ground covers intent to occupy by the owner or the owner's spouse, domestic partner, children, grandchildren, parents or grandparents for at least 12 continuous months as a primary residence. For leases entered into on or after July 1, 2020 (or July 1, 2022 for a mobilehome tenancy), that ground applies only if the tenant agrees in writing or the lease allows it. A no-fault termination carries further obligations under that statute, and an attorney who handles landlord-tenant matters can explain them for a particular property.

How the Sale Process Works With Tenants in Place

Three broad ways to sell exist, and tenants affect each one differently.

A listing with a licensed real estate agent. The property goes on the open market. Showings depend on entry rules and on the tenants' cooperation. A buyer who wants to move in may need the property vacant, while an investor may value the rent.

A sale by the owner without an agent. The seller handles pricing, showings and paperwork directly, including the notices tenants are owed. The buyer pool is similar to a listing, though reached differently.

A direct sale to a buyer who pays cash and takes the property as it is. The buyer usually buys with the tenants in place and accepts the property's condition. A direct offer is often lower than what the open market might bring, because that buyer absorbs repair costs, risk and the expense of reselling. In return the seller gets less preparation, fewer showings and no wait on a buyer's loan approval. A reader can get an offer on an inherited property from Silver Lining Inherited Property for a direct as-is sale, and asking carries no obligation to sell. The tradeoffs between cash and listing look different for every family.

Whichever way a family considers, comparing written offers and estimated net proceeds is how it tells which fits. Net proceeds are the price less commissions, repairs, carrying costs, loan payoffs and closing costs. In every case the buyer steps into the seller's shoes as landlord, and the lease and statutes continue.

A house can be sold in its present condition, and repairs on an inherited house are a choice with costs on both sides. Disclosure duties are separate. The Civil Code article that contains the Transfer Disclosure Statement requirement does not apply, under Civil Code section 1102.2, to sales ordered by a probate court or to sales by a fiduciary administering a trust or decedent's estate. The fiduciary exemption does not apply to a natural person who is trustee of a revocable trust and was a former owner of the property or an occupant within the preceding year. Other disclosures, such as natural hazard disclosures, are governed separately.

A probate sale keeps its court steps whoever buys. Under Probate Code section 10308, except as Probate Code section 10503 provides, every sale of estate real property must be reported to and confirmed by the court before title passes, and if the personal representative does not file the report and petition within 30 days after the sale, the buyer may. 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 independent administration authority. Selling during probate turns on which authority the court granted.

Tax Considerations for Inherited Rental Property

A family selling a rental is often worried about two tax questions: income tax on the sale and property tax for whoever keeps it.

Basis. Basis is the starting figure used to measure gain on a sale. 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 alternatives are its value on the alternate valuation date if the estate elects that under section 2032, its special-use value if elected under section 2032A, or, to the extent the section 2031(c) exclusion applies, the decedent's own basis. In plain words, if the house was worth more at death than the parent paid, the heir's starting point is usually that date-of-death value. Depreciation the parent took on a rental is a question for a tax professional.

Rental income. Rent collected between the death and the sale is income to the estate, the trust or the beneficiaries, depending on how the property passed. A CPA, an enrolled agent or a tax attorney reviews the income-tax and basis questions for a specific sale.

Property tax. Proposition 19 reshaped the parent-child exclusion. For transfers on or after February 16, 2021, Rev. & Tax. Code section 63.2 excludes from reassessment, when a claim is filed, the transfer of real property that is the principal residence of an eligible transferor between parents and children, or between grandparents and grandchildren where the grandchild's parents who are the grandparents' children have died, among other transfers the section covers. A house the parent rented to tenants rather than lived in falls outside that principal-residence exclusion. Even for a parent's principal residence, the exclusion requires the home to become the principal residence of the child or grandchild within one year of the transfer, and that person to file for the homeowners' or disabled veterans' exemption within a year of the transfer.

The claim must be filed within three years after the transfer, or before a transfer to a third party, or before an eligible transferee stops occupying the residence, whichever is earlier. Alternatively, it is timely within six months after a notice of supplemental or escape assessment is mailed. A later claim on property not yet sold to a third party applies going forward, from the lien date of the year it is filed. The county assessor's office administers these claims.

When Heirs Disagree About Selling

Siblings who inherit together commonly own the house as tenants in common, meaning each holds an undivided share of the whole property rather than a particular room or half. Each co-owner's agreement matters, and one co-owner generally cannot sell the others' shares.

When co-owners cannot agree, California law provides a partition action. It is a court proceeding in which a co-owner asks the court to divide the property or order it sold and the proceeds divided. California has also added the Partition of Real Property Act, which sets its own procedures for some co-owned property, including some inherited property.

A contested partition is a different subject, handled by an attorney who litigates trust and probate cases. Meanwhile the tenants' position stays the same: the lease, rent obligations and California's protections continue whatever the owners are disputing.

Rent or Sell: What Shapes the Decision

Keeping the property makes the heirs landlords under California law. They take on habitability and maintenance duties, local ordinances, and, where it applies, the Tenant Protection Act. Under Civil Code section 1947.12, a covered owner may raise rent over any 12-month period by no more than 5 percent plus the change in the cost of living, or 10 percent, whichever is lower, in no more than two increments for the same tenant. The statute lists its own exemptions.

Selling ends those landlord duties and turns the property into money the heirs can divide or use. The factors that usually shape the choice are:

• the property's condition and what repairs it needs;
• the existing lease terms and rent level;
• the local rental market;
• carrying costs, such as property taxes, insurance, maintenance and management;
• the tax picture on a sale compared with ongoing rental income; and
• each co-owner's finances and goals.

A below-market lease can matter in both directions. Such a lease may be worth less to a buyer who wants to move in than to an investor who values the existing tenancy. Comparing net sale proceeds against projected rental income after expenses is how a family makes the call, and a CPA or financial advisor can model the after-tax comparison. Rules and buyer interest also vary by place; San Diego County inherited sales show how one county's details fit in.