The House: Every Scenario

The house was in Cupertino, California. Bought by their parents in 1982 for $185,000. At their mother's death in late 2024, comp value: $2.8 million. Mortgage paid off in 2009. Three siblings. Priya, 51, lived in Sunnyvale, 15 minutes away. Worked as a software engineer at a public tech company. Two kids in middle school. Wanted to keep the house. Specifically: wanted to move her family INTO the house, which was 4 bedrooms and substantially bigger than their current 3-bedroom condo. Raj, 48, lived in Seattle. Worked at a consulting firm. One kid in elementary school. Wanted to sell and split the proceeds. Specifically: the $933K he would net from a third of the sale would let him pay off his mortgage and put his kid through private school without strain. Anjali, 44, lived in Austin. Worked as a nurse practitioner. Recently divorced, raising twin teenagers as a single parent. She didn't care what happened with the house — she cared what happened with the money. She needed her third immediately to stabilize the household post-divorce. The will, drafted in 2018, said: "I leave my entire estate, in equal shares, to my children Priya Patel, Raj Patel, and Anjali Patel." The conversation, two weeks after the funeral, was tense. Priya proposed buying out Raj and Anjali. She had $200K liquid and could cash out enough retirement to get to maybe $400K, but to buy out two-thirds of a $2.8M house she would need at least $1.6M after closing costs and taxes. She didn't have it. The bank would lend her against the house, but only at investment-property rates because she'd be using it as her primary residence after the buyout. The math was tight. Raj suggested a compromise: sell the house, give Priya right of first refusal at a $200K discount off comp value. Priya could find a smaller property and use her share of the proceeds as the down payment. Anjali agreed immediately. Priya pushed back. The house had been their mother's for 42 years. She had grown up there. Her kids had spent every Diwali there. She wasn't ready to lose it. The conversation ended without a decision. Two weeks of silence followed. In the third week, an estate planning attorney — who had been their mother's attorney — called Priya and asked if she could schedule a meeting with all three siblings. She offered to facilitate. Free of charge, in honor of their mother who had been her client for 12 years. In that meeting, the attorney laid out four options on a whiteboard: OPTION 1: Sell. $2.8M minus 6% closing costs minus capital gains tax (with step-up basis, the gains were ~$50K above the date-of-death FMV after holding the property six months — minimal tax). Net to estate: ~$2.62M. Each sibling: ~$873K. Timeline: 90 days to listing, ~60 days to close, ~120 days to distribution. OPTION 2: Priya buys out Raj and Anjali at FMV. Required cash from Priya: $1.87M after credit for her one-third share. Available cash from Priya: ~$400K. Gap: $1.47M. Realistic financing options: cash-out from retirement (taxed plus penalty if under 59½), HELOC against current home, jumbo mortgage on the inherited property. Math: tight to impossible without a significant cash gift from Priya's husband's family. OPTION 3: Sell to Priya at $200K discount. Net to Priya: gets the house. Net to Raj and Anjali: $867K each instead of $873K. Financial difference for them: $6,000. Emotional difference: meaningful. OPTION 4: Keep the house in joint ownership for one year, rent it out, see what happens. Carrying costs: ~$1,800/mo (insurance, property tax, maintenance). Rental income at market rate: ~$5,500/mo net. The $3,700/mo positive cash flow could be distributed thirds OR saved toward a future buyout. The attorney let them sit with the four options for a week. She gave them a worksheet for each option with the numbers, the timeline, and the emotional considerations. The decision they reached was Option 3 with a modification. Priya bought the house from the estate at a $200K discount off FMV. To finance the $1.67M she needed, she sold her condo, took her share of the estate, took out an $800K mortgage on the new property, and accepted a $200K interest-free loan from her brother Raj (to be repaid over 10 years). Raj agreed to the loan because Priya was now living in the house with their family — and because the alternative (Priya not getting the house) was probably going to fracture the relationship between her family and theirs permanently. Anjali got her cash three months later. She used it to stabilize her household post-divorce, put a down payment on a smaller home in Austin, and put aside college money for the twins. The relationship between the three siblings is now, two years later, intact. Not perfect — Anjali still has some lingering feelings about Priya getting the house at a discount when she herself needed every dollar. But they talk. They visit. Their kids spend time together. The mother who left them the house would have considered that the actual inheritance.

Step-up in basis is the most important tax concept in inherited real estate, and most families discover it the hard way. Under IRC §1014, when you inherit property, your cost basis "resets" to the fair market value at the date of death. This means when you eventually sell, you only owe capital gains tax on the appreciation AFTER the date of death — not on the lifetime of appreciation that the decedent never paid tax on. Example: Your mother bought a house in 1985 for $80,000. She made $40,000 in capital improvements over 35 years, bringing her cost basis to $120,000. She dies in 2024 with the house worth $850,000. You inherit it. Six months later you sell it for $880,000. WITHOUT step-up: $880,000 sale - $120,000 basis = $760,000 capital gain. At long-term capital gains rates plus net investment income tax plus state tax (CA), the tax bill could be over $200,000. WITH step-up: $880,000 sale - $850,000 basis = $30,000 capital gain. Tax bill: ~$8,000. Same sale. Difference: $192,000. That's the value of step-up basis. The catch: you must document the date-of-death FMV. The IRS won't take your word for it. The standard documentation is a licensed appraisal performed by a qualified real estate appraiser, with the valuation date set to the date of death. Cost: typically $400–$600 for residential property. Time: 1–2 weeks to schedule, 1–2 weeks to deliver the report. Get the appraisal within 6 months of the date of death. The later you order it, the harder it gets to defend the valuation. After a year, you're often working with comparable-sales data from a market that has moved significantly, and the IRS may challenge the basis on audit. A few specific situations: ALTERNATIVE VALUATION DATE: The executor can elect to use a date 6 months after the date of death instead of the date of death itself. This is useful only if asset values dropped during that 6-month window. The election applies to the ENTIRE estate, not individual assets. Election must be made on the estate's Form 706. JOINT PROPERTY: For property held in joint tenancy with right of survivorship between spouses (in non-community-property states), only the deceased spouse's share gets the step-up. In community-property states, the surviving spouse gets a "double step-up" — both halves get the new basis. This is a meaningful tax advantage for couples in California, Texas, Arizona, Nevada, Washington, and the other community-property states. BUSINESS INTERESTS: Closely-held business interests need a formal business valuation, not a market-comparable analysis. Much more complex and expensive ($3,000–$10,000+). INHERITED IRAs DON'T GET STEP-UP: Retirement accounts (Traditional IRA, 401(k), 403(b)) don't get a step-up. Distributions are taxed as ordinary income to you. Roth IRAs may be tax-free if the 5-year holding period was satisfied by the original owner. CONCURRENT OWNERSHIP: If the property was held in a revocable trust at the time of death, you still get the step-up. If it was held in an irrevocable trust, the rules vary — talk to your CPA. The actionable summary: when someone in your family dies and there's appreciated real estate involved, order the date-of-death appraisal within 6 months. It's the cheapest tax-planning move you'll ever make.