John was fortunate to inherit real estate. At least that’s what he thought while his father was alive. His father had built up a portfolio of 27 different properties over the many years that he invested in real estate.
When his father passed away, John was named the executor and John’s sister also inherited a portion of the portfolio.
Unfortunately, John discovered that there were incomplete records for many properties and it became a significant burden of time, resources, and frustration in order to untangle the history of all these properties.
It took John quite a few years in order to get the properties in a reasonable condition and sell them. Many had been neglected as his father aged, leading to a decrease in value. There were a few properties John kept for the long term but most of them he did not want to own. It was also made more challenging as he had to take into consideration his sister’s desire for the assets, as an heir as well.
Like John’s Father, many investors within our market are long-term buy & hold investors. Often sales take place after many years, prompted by the passing of the owner, or a realization that owners know they need to retire from real estate.
For real estate investors and their heirs, how their properties are handled at this time can mean the difference between preserving wealth and unintentionally eroding it.
Today we cover some best practices and how to avoid some pitfalls we have seen investors and their family make.
1. Understand How the Property Was Titled
The first and most important question is when real estate is inherited is: how was the property owned? If the property was in an LLC, who owned the entity?
Ownership structure determines what happens next:
- Joint Tenancy (with right of survivorship): Automatically passes to the surviving owner(s), avoiding probate.
- Tenancy in Common: The deceased’s share passes through their estate, not automatically to the other owners.
- Owned in a Trust: The trustee manages or distributes the property according to the trust terms—often the smoothest transition.
- Sole Ownership: Typically requires probate.
For investors, this is where planning ahead pays off. Properties held in trusts or structured entities (LLCs with operating agreements) are significantly easier for heirs to manage than individually held assets.
When heirs receive real estate, they should always check the title to make sure and liens and past encumbrances are not outstanding or unknown. Deeds should be updated according to the terms of the new ownership.
2. The Probate Process (and Why It Matters)
If the property does not transfer automatically, it will likely go through probate—a court-supervised process of settling the estate.
Key realities heirs should understand:
- Probate can take months to over a year, depending on complexity.
- The property may be frozen—limiting the ability to sell or refinance until authority is granted.
- An executor (or personal representative) will be appointed to manage decisions, if one is not designated by a will.
For the heirs, delays can create missed opportunities—especially if the property needs repositioning, leasing, or immediate capital improvements.
3. The Step-Up in Basis: A Major Tax Advantage
One of the most important (and often overlooked) benefits heirs receive is the step-up in cost basis.
When a property is inherited, its tax basis is typically adjusted to its fair market value at the date of death.
Why this matters:
- If the property appreciated significantly during the original owner’s lifetime, that gain is essentially erased for tax purposes.
- If heirs sell shortly after inheriting, capital gains taxes may be minimal or even zero.
Example:
An investor bought a property for $300,000 decades ago. At death, it’s worth $900,000.
The heirs’ new basis = $900,000.
If they sell for $920,000, they’re only taxed on $20,000—not $620,000.
For families with large portfolios, this is one of the most powerful wealth-transfer tools in real estate.
Keep in mind that while this step up in basis may eliminate the capital gains that would otherwise be due, it does then set the value for the estate/inheritance taxes that may be owed at either federal level or state level.
4. Debts, Liens, and Financial Structure
Inherited real estate often comes with existing financial obligations:
- Mortgages
- Lines of credit
- Tax liens or municipal claims
- Partnership obligations
Heirs should not assume the property is “free and clear” just because it was owned for a long time.
Key considerations:
- Commercial loans may have due-on-sale, or due-on-transfer clauses, though many lenders work with heirs. The death of the owner, especially if it leads to a transfer of ownership to a beneficiary, can act as a trigger for this clause.
- Refinancing may be necessary to restructure ownership or pull-out equity.
- Cash flow analysis should be done immediately to determine if the asset is sustainable, especially when there is a mortgage involved.
5. Should Heirs Hold or Sell the Property?
This is often the biggest decision—and it should be approached like an investor, not just a beneficiary.
Reasons to Sell:
- Heirs want the cash instead
- The property is underperforming
- Deferred maintenance is too significant
- No one wants to actively manage it
Reasons to Hold:
- Strong cash flow
- Long-term appreciation potential
- Tax advantages (post step-up)
- Opportunity to reposition or improve the asset
Smart investors treat inherited property as a new acquisition decision:
“If I didn’t already own this, would I buy it today?”
If the answer is no, selling may be the right move.
Often heirs do not have a prolonged interest in owning the property. However, if you plan to leave real estate to your loved ones- educating them about the property ahead of time, and teaching them the skills of a real estate investor can go far, for when the time comes that they do inherit the property.
6. Multiple Heirs = Potential Conflict
When multiple heirs inherit a property, challenges often arise:
- Different financial goals (income vs. cash-out)
- Unequal involvement in management
- Disagreements on timing or strategy
Without clear agreements, these situations can lead to forced sales or long-term tension.
Best practices:
- Establish a formal operating agreement for the ownership entity, which details who is in charge when the current owner passes away.
- Consider a buyout structure for uninterested heirs, which makes it a simple process and eliminates conflict within families when some heirs want to exit and others do not.
- Assign clear decision-making authority. This will go far in keeping peace within multiple heirs and simply decisions.
- If you have multiple assets and multiple heirs, consider leaving a single property to a single heir, instead of joint ownership for all heirs of multiple properties. This method can simplify a great deal the question of who is in charge and eliminate conflicts.
Experienced investors often plan for this ahead of time through trusts or entity structures.
7. Planning Ahead: What Smart Investors Do Differently
Seasoned real estate investors can help plan for the future by:
- Place properties into revocable living trusts
- Use LLCs with defined succession plans and clear asset management designations.
- Property Playbook: Provide heirs with a “property playbook”. This should be complete information on the past history of the property, Entity documents, contact information for tenants, vendors and any other relevant info. This can make the job of the heir far easier.
- Plan long term care needs accordingly. Many families are faced with the declining health of their elder, and face difficult decisions regarding family held real estate, especially if the value is needed to pay for the care of their aging loved one. Having a plan in place to sell the property at a certain point can take a lot of burden off the heirs.
- Consider selling in advance. While many owners are reluctant to pay the capital gains tax of a long-held asset, owners should keep in mind that their heirs may need to pay Inheritance/Estate taxes at the state level, even if there is a federal tax exemption.
This may make the benefit of the ‘step-up in basis’ less. Accordingly, for the simplicity of passing on the cash value, some owners we work with opt to sell while they are in good health, to make their estate much simpler for their loves ones. This not only protects the assets but preserves family relationships and reduces costly mistakes.
Final Thoughts
Inheriting real estate can be a powerful opportunity—but only if handled correctly.
For heirs, the key is to quickly move from emotional reaction to informed decision-making. For investors, the takeaway is even more important: how you structure and plan your portfolio today directly impacts how successfully it transfers tomorrow.
Handled properly, inherited real estate can continue generating income, building wealth, and creating long-term financial stability for the next generation.
If you have inherited Real Estate and would like an Opinion of Value or Analysis on ways to increase income, CONTACT US for a Complimentary Consultation.
We can provide tips to increase income and decrease potential liability, ensuring the family legacy is protected. Contact us today HERE to ensure the value of your asset is preserved.
