Inheriting a property from a loved one can be a meaningful gift, but it also comes with financial responsibilities—especially if the home has an existing mortgage. Whether you’re inheriting a primary residence, a vacation home, or investment properties, understanding your options is crucial. Let’s explore what happens when you inherit a house with a mortgage and how to navigate the process.
A little over 60% of homes carry a mortgage, the lowest level since 2005, according to US census data. If you inherit property, there’s a strong chance it still has an outstanding loan. But does inheriting a home mean inheriting the mortgage, too?
The answer depends on the estate’s structure and financial situation. When someone passes away, their debts—including mortgage loans—don’t automatically disappear. Instead, the estate is responsible for settling unpaid debts, with probate court overseeing the process. Here’s what could happen:
When inheriting a house with a mortgage, you have several options depending on your financial situation and long-term goals:
Federal law provides protections allowing heirs to take over responsibility for a mortgage in some cases. If you qualify, you may assume the loan and continue making payments under the existing terms. This can be a good option if the inherited property’s mortgage rate is lower than current market rates.
Pay Off the Loan
If you have the financial means, you can pay off the mortgage in full. You may also consider refinancing the loan to adjust the loan terms, lower the monthly payment, or access home equity through a cash-out refinance.
There are plenty of reasons you might choose to sell the house you inherit. Selling the inherited home may be the best solution if:
If you choose to sell, be aware of potential capital gains tax implications and exemptions that may apply to your situation.
If you’re unsure which option is best, we’re happy to review your situation with you and or your tax planner so you can make an informed decision about whether to live on the property, hold it, or sell it.
If you inherit a property that’s underwater—meaning the mortgage balance is higher than the market value of the home—you have several options, including walking away from the inheritance, selling the property through a short sale, or offering the lender a deed-in-lieu of foreclosure. In some cases, you may also be able to negotiate with the lender to lower the mortgage balance or work out a new payment plan.
If you’re facing this situation, it’s important to get professional advice to avoid financial loss.
If you inherit real estate that’s paid off, that’s great news! Homeownership has many advantages over renting, but be aware that you’re still on the hook for the usual expenses related to owning a home. Budget accordingly so you’ll be prepared when bills like property taxes, homeowners’ insurance and maintenance services come due.
Inheriting a home can also come with tax implications, and what you owe will depend on where the property is located and what you decide to do with it. Here’s a breakdown of some key taxes to be aware of when inheriting a house with a mortgage:
Local Property Taxes
Property taxes are set by the local municipality based on the home’s assessed value. If the previous homeowner had an escrow account tied to their mortgage, these taxes were likely paid on time. However, if the home was fully paid off or you’re unsure about its tax status, it’s a good idea to check with the local tax office to ensure there aren’t any outstanding balances. Property taxes are typically due biannually, so factor them into your budget if you plan to keep the home long-term.
State Inheritance Tax
Some states impose an inheritance tax based on the value of the estate, meaning you may need to pay taxes on the property you inherit. This tax comes out of your pocket rather than the estate itself. Fortunately, not all states have an inheritance tax, but if they do, the rates and exemptions can vary. For example, Kentucky and New Jersey have some of the highest inheritance tax rates, reaching up to 16%.
Federal Estate Tax
The federal government also taxes large estates, but only if the total estate value exceeds a certain threshold. In 2025, this threshold is set at $13.99 million. If the estate you inherit falls below that amount, you won’t owe federal estate taxes. However, some states have their own estate taxes with different exemption limits, so it’s worth checking local laws to understand how they might affect you.
It’s important to note that estate taxes are paid from the estate itself before any assets—including the home—are distributed to heirs. If the estate doesn’t have enough liquid assets to cover the tax bill, the home may need to be sold to satisfy the debt.
Capital Gains Tax
Capital gains tax only applies if you sell the home, and the amount you owe depends on how much the property has appreciated since you inherited it. When a home is passed down, the IRS applies what’s called a “step-up in basis,” which means the property’s value is reset to its fair market value at the time of inheritance. If you sell the home later for more than that stepped-up value, you may owe capital gains tax on the profit.
Since tax laws can be complex and vary by location, it’s always a good idea to consult a CPA or tax professional to fully understand your obligations. Whether you’re planning to live in the home, sell it, or rent it out, knowing the tax implications can help you make informed decisions about your inheritance.
Beware of common scams targeting inheritors that exploit the emotional and financial vulnerability of individuals who have recently inherited a property. Here are some common scams and tips to safeguard personal and financial information:
Common Scams:
Inheriting a property with a mortgage can be overwhelming, but understanding your options and responsibilities can help you make informed decisions. Whether you’re inheriting a house with a mortgage, dealing with an underwater mortgage, or inheriting mortgaged housing, it’s essential to consult with professionals to ensure the best outcome for your financial situation.
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