Wealth Insights
6 hidden costs of inheriting property

Article

Published February 19, 2025

Worried about taxes on inherited real estate? There are steps you can take to minimize expenses and simplify your life— so you can enjoy your inheritance.

What happens when you inherit property?

Whether you’re inheriting your childhood home, the family vacation house, or a portfolio of rental properties, you’ll inherit more than cherished memories or a beloved family getaway spot. You’ll also inherit taxes and expenses associated with real estate that could be unexpected or greater than anticipated. But that doesn’t mean you can’t minimize the associated costs. Here are six financial considerations when inheriting real estate.

1. Planning for estate and inheritance tax

Estate tax

Federal estate tax applies when an estate’s value, including real estate, exceeds a certain threshold, which you can find on the IRS website. For 2025, the federal estate tax applies to estates worth more than $13.99 million.¹ There is uncertainty surrounding exemption amounts in 2026 and beyond due to expiring provisions in the Tax Cuts and Jobs Act.

A minority of states also have an estate tax, so it’s crucial to be aware of a state’s exemption amounts and rules, some of which are complex.

True to its name, an estate tax comes out of the estate before you take ownership of inherited property. That means the property would only be affected if the estate lacks sufficient liquid assets to pay estate taxes. If the estate is short on cash, property may need to be liquidated.

Inheritance tax

Depending on where a decedent lives and the location of the property, you may also be required to pay state inheritance tax on real estate — which comes out of your own pocket. Kentucky and New Jersey have the highest top marginal inheritance tax rate of 16 percent, for example.²

2. Considering a home appraisal

A real estate inheritance may require a valuation, though in general it’s not a major cost to the inheritor. “Generally, the executor may pay for the cost of an appraisal from current estate proceeds, so it’s usually of little cost or concern to the beneficiary,” says Bryan P. Koepp, Wealth Planning Executive for Regions Private Wealth Management.

Most often, you’ll want a valuation so that the basis of the asset is “stepped up” to its fair market value at the time of the owner’s death or alternate valuation date. This will adjust the value to include any improvements made to the property prior to the decedent’s death. If you sell the property, the sale generates taxes only for gains following the step up in basis valuation, not from the initial date of purchase, which might have been decades prior.

3. Factoring in property maintenance

If you decide to keep the property and rent it, remember maintenance and overhead can take a big bite out of profits. Landlords are not legally required to hold landlord insurance, but many mortgage and property management companies will require it. These policies can cost as much as 25 percent more than a homeowners policy for the same property.

Maintenance requirements depend on property type and other factors, but often include landscaping, roofing, and ongoing repairs. Often, money is set aside in a trust to cover maintenance and insurance, at least until the transfer of the deed.

In any case, it’s important to protect the asset’s worth by keeping it insured, in good repair, and—whether it’s a commercial or residential property—tenanted.

4. Adding up average utility expenses

Homebuyers often ask previous owners for a year’s worth of utility bills for budgeting purposes, and it’s wise to do the same when you’re inheriting real estate. You may be surprised how much it costs to heat a vacation house or an old family mansion.

You might find opportunities for capital improvements, such as installing new windows. “These updates may lower your utility bills and qualify for tax credits,” Koepp says.

5. Anticipating the property tax bill

Property taxes vary by locality and can make a big difference in what you’ll pay.

If you inherit a Gulf Coast vacation home in Mobile, Alabama, you’ll find property tax rates change significantly 60 miles west in Biloxi, Mississippi, and 60 wiles east in Pensacola, Florida. These seemingly small differences can equal thousands of dollars in additional annual property taxes.

“Get in the habit of setting aside a certain amount per month to put toward property taxes,” Koepp says.

However, property taxes are among common expenses landlords can deduct on their tax returns.

6. Calculating any capital gains tax

A capital gains tax is imposed on the sale of an asset. The step up in cost basis (the base price of the asset for tax purposes) discussed earlier will reduce most capital gains on inherited real estate to zero if you’re selling a property soon after inheriting it.

However, if you rent the inherited property for a time, the value may increase. In this scenario, selling the inherited property may subject you to capital gains taxation.

However, if it’s an investment property, consider a 1031 like-kind exchange. This gives you the option of selling the property and reinvesting the proceeds into a similar property, without incurring capital gains tax.

Guidance for inherited real estate

As you can see, inheriting property can bring on financial complexity. Add to that the complex emotions such an event can trigger and the family dynamics at play, and you can start to understand why so many heirs seek out guidance from an objective third party such as a wealth advisor to navigate it.

No matter what you decide to do with inherited real estate, Koepp says it’s important to have a strategy in place before you inherit the property. Knowing the rules and regulations ahead of time will help you understand the costs involved and how to minimize them.

While inheriting real estate may bring about difficult conversations with family, ultimately the inherited real estate should bring you happiness, not headaches. Talking about possible problems beforehand can give everyone involved some peace of mind. Whatever course of action you take, decisions should not be made lightly.