Inheriting a paid-off house gives you a valuable asset and a short list of things that need attention quickly: securing the property, moving the title into your name, understanding the tax picture, and deciding whether to sell, move in, or rent. The single biggest financial advantage you have is the stepped-up basis, which resets the home’s value for capital gains purposes to its fair market value on the date of death and can wipe out decades of appreciation from your eventual tax bill.
Protect the House First
Before anything legal happens, the house needs physical care. If no one is living there, change the locks, confirm windows and doors are secure, and look for leaks, storm damage, or anything else that could get worse while the estate is being sorted out. The executor is legally responsible for keeping the property in good condition during probate, which includes paying property taxes, keeping utilities on, and basic upkeep.1Justia. Managing Assets During Probate and an Executor’s Legal Duties
Call the homeowner’s insurance company within 30 days of the death and send a copy of the death certificate. The existing policy stays in force, but it can lapse if premiums go unpaid, and most insurers want the executor added as a named insured. If the home will sit empty for a long stretch during probate, the insurer may require a vacant-property endorsement to keep coverage in place.
Check the Title for Liens
“Paid off” means no mortgage. It does not mean the title is clean. The property can still carry unpaid property tax liens, mechanic’s liens from past renovations, or judgment liens from old lawsuits. Order a title search early so you know exactly what you are inheriting before putting money into the place.
One lien catches heirs off guard more than any other: Medicaid estate recovery. Federal law requires every state Medicaid program to seek repayment from a deceased recipient’s estate for nursing facility care, home and community-based services, and related hospital and drug costs if the recipient was 55 or older.2Medicaid.gov. Estate Recovery If the previous owner received long-term care through Medicaid, the state can file a claim against the estate or, in some cases, place a lien on the home while the person is still institutionalized.3Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
There are protections. States cannot pursue recovery when the deceased is survived by a spouse, a child under 21, or a blind or disabled child of any age. States must also offer hardship waiver procedures for cases where recovery would cause undue financial hardship to an heir.2Medicaid.gov. Estate Recovery Where none of those apply and the care was substantial, the claim can be big enough to force a sale.
How the House Legally Becomes Yours
Being named in a will does not transfer the deed. How you actually get title depends on how the previous owner set things up.
Through Probate
Probate is the court-supervised process that validates a will, inventories assets, settles debts and taxes, and distributes what remains to heirs. Even with a paid-off house and a clean will, the property usually has to pass through probate before title can change hands. If there is no will, state intestacy law decides who inherits.
The executor (or a court-appointed administrator if there is no will) runs the process: ordering a professional appraisal, paying debts from the estate, filing court paperwork, and preparing the deed that transfers ownership to you. Expect several months at a minimum, and complex or contested estates can run two years or longer.4FindLaw. Probate Process and Timeline
Outside of Probate
If the previous owner planned ahead, the house may skip probate entirely. A transfer-on-death deed names a beneficiary who automatically receives the property at death, with no court involvement; the beneficiary has no rights while the owner is alive, and the owner can revoke the deed anytime. Around 30 states and the District of Columbia allow these deeds.5Nolo. Transfer-on-Death Deeds for Real Estate
A revocable living trust works much the same way. If the house was titled in the trust, the successor trustee distributes it to beneficiaries without going to court. Joint tenancy with right of survivorship is another route, where a surviving co-owner automatically becomes sole owner. In all three cases a new deed still has to be recorded, but the process is faster and cheaper.
Small Estate Procedures
Some states offer simplified procedures for smaller estates. If the total probate estate falls under a state-set threshold (ranging roughly from $10,000 to $275,000 depending on where you are), a small estate affidavit may substitute for full probate. Some states restrict these shortcuts to personal property and will not allow them for real estate, so check your state’s rules before counting on it.
Record the New Deed
Whether the house went through probate or bypassed it, a new deed naming you as owner has to be recorded at the county recorder’s or land records office. Until it is recorded, there is no public notice of your ownership, which matters the moment you want to sell, refinance, or take out a home equity loan.
The executor or trustee prepares the deed, which identifies the estate or trust as transferor and you as the new owner, with a legal description of the property. You will also need a certified copy of the death certificate and, if the house went through probate, the court order authorizing the transfer. The deed is signed and notarized before filing, and recording fees vary by county but are generally modest.
The Stepped-Up Basis
This is the tax rule that matters most when a paid-off house changes hands. Under federal law, your cost basis in inherited property resets to the home’s fair market value on the date of death, not what the previous owner originally paid for it.6Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent For a house bought decades ago, the step-up often erases almost all of the taxable appreciation.
An example. Say the previous owner bought the house in 1990 for $120,000, and it was worth $450,000 on the date of death. Your basis is $450,000. If you sell for $460,000, you owe capital gains tax on $10,000, not on $340,000.7Internal Revenue Service. Publication 551 (12/2025), Basis of Assets Sell for less than the stepped-up basis and you have a capital loss you can use to offset other gains or up to $3,000 of ordinary income per year. Gains get reported on Schedule D and Form 8949.8Internal Revenue Service. Gifts and Inheritances
Get a professional appraisal that reflects the date-of-death value, done before any renovations or repairs change the home’s condition. That appraisal is your documentation if the IRS ever questions the gain you report.
Estate and Inheritance Taxes
Most heirs will not owe federal estate tax. The federal exemption for 2026 is $15 million per individual, or effectively $30 million for a married couple using portability. The One, Big, Beautiful Bill Act, signed into law on July 4, 2025, raised the exemption and made it permanent, replacing the temporary increase from the Tax Cuts and Jobs Act.9Internal Revenue Service. What’s New – Estate and Gift Tax Unless the entire estate (not just the house) is above $15 million, there is no federal estate tax.
State taxes are a different story. A handful of states impose their own estate taxes with much lower exemption thresholds, and five states levy an inheritance tax on the person receiving the assets: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland imposes both. Inheritance tax rates depend on your relationship to the deceased: spouses are typically exempt, children and direct descendants often pay reduced rates, and distant relatives or unrelated beneficiaries face the highest rates, reaching 15% to 16% in some states.10Tax Foundation. Estate and Inheritance Taxes by State, 2025
Sell, Move In, or Rent
Once the title is yours, you have three practical options, and the tax picture differs for each.
Selling
Selling soon after inheriting is the simplest route tax-wise. Because the basis has reset to the date-of-death value, a quick sale often produces little or no taxable gain. The longer you hold the property, the more it may appreciate above the stepped-up basis, and the larger your eventual tax bill. Federal long-term capital gains rates for 2026 are 0%, 15%, or 20% depending on taxable income, and high earners may also owe the 3.8% net investment income tax on top of that.
Moving In
Living in the house means you pick up ongoing costs: property taxes, insurance, utilities, and maintenance. Some jurisdictions reassess property values when ownership changes, which can push the tax bill above what the previous owner paid. A few states offer parent-to-child transfer exclusions that limit or prevent reassessment, but these are not universal and typically require an application.
Using the house as your primary residence for at least two of the five years before selling lets you exclude up to $250,000 of capital gains ($500,000 if married filing jointly) under the principal-residence exclusion. That stacks on top of the stepped-up basis. For a non-spouse heir, the two-year ownership and use clock starts when you inherit; you do not get credit for the previous owner’s time in the home. A surviving spouse can count the deceased spouse’s ownership and use period as their own.11Office of the Law Revision Counsel. 26 U.S. Code 121 – Exclusion of Gain From Sale of Principal Residence
Renting
Rental income is taxable and gets reported on Schedule E. You can deduct property taxes, insurance, repairs, management fees, and depreciation against that income.12Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040) Depreciation uses the date-of-death value as the starting point, split between land (not depreciable) and the building (depreciable over 27.5 years), typically allocated using the ratio of their assessed values for property tax purposes.
Depreciation reduces your adjusted basis, so when you sell you owe capital gains tax on the appreciation plus any depreciation you claimed or were required to claim, with the recapture portion taxed at up to 25%. A rental does not qualify for the principal-residence exclusion unless you convert it back to personal use and meet the two-year residency requirement before selling.
Inheriting With Siblings
If the house comes to you and one or more co-heirs, you typically all become tenants in common, each owning a percentage share. One heir may want to sell right away while another wants to keep the house. The law gives neither side an easy override.
Most situations resolve one of two ways: a buyout, where one heir purchases the others’ shares at fair market value, or an agreement to sell and split the proceeds. If co-owners cannot agree, any owner can file a partition action asking a court to divide the property (rarely practical with a house) or order a sale. Partition sales often fetch lower prices than voluntary sales, so negotiating is almost always the better path.
While you co-own, each heir is responsible for their share of property taxes, insurance, and upkeep. If one heir lives in the house and the others do not, a written arrangement for expenses prevents a disagreement from hardening into a lawsuit.