Inheriting an investment property in a dynamic market like San Diego can be both an exciting and daunting experience. With potential for rental income or a profitable sale, there are numerous paths to consider, but each comes with its own challenges. Here’s a step-by-step guide to help you make the best decisions for your new assets.

1. Finding an Agent Specializing in Multifamily Sales

The first step when you inherit an investment property is to partner with a real estate agent who specializes in multifamily properties in San Diego, like ACI Apartments. Multifamily properties—like duplexes, triplexes, and apartment buildings—require specific expertise, especially as these are valued differently than single family homes. A specialized agent can help you understand the local market, give you realistic estimates for rental income or sale prices, and ensure you’re aware of zoning regulations or potential for property improvements. Having an expert on your side can provide invaluable guidance as you navigate your options.

2. Understanding the Property’s Value

Before you make any major decisions, it’s essential to get a clear picture of the property’s worth. A professional appraisal can provide an accurate market value, factoring in current market conditions and the specific features of the property. Your agent can also help by conducting a comparative market analysis (CMA), which compares your property to similar ones recently sold in the area. The value of multifamily property takes into consideration the specific unit mix, unit square footage, condition, and income. Knowing the property’s value will not only help you decide whether to sell or hold but also play a key role in determining tax obligations, as discussed next. At ACI Apartments, we offer a free valuation to manage this step when you inherit investment properties, because we appreciate that understanding your property’s worth can sometimes feel overwhelming. 

3. Understanding the Tax Consequences When You Inherit Investment Property

Tax implications can be complex when inheriting investment properties, and consulting a tax professional is crucial. In most cases, you’ll receive a step-up in basis, meaning the property’s tax basis is adjusted to its market value on the date of inheritance. This adjustment can significantly reduce capital gains tax if you decide to sell the property, but it’s still essential to understand other potential taxes, such as California’s inheritance tax rules. Additionally, if you plan to rent out the property, there are tax benefits, including deductions for property expenses and depreciation.

4. Deciding on the Next Steps: Sell, Split, or Reinvest?

Once you have a firm understanding of the property’s value and tax implications, the next decision is what to do with the property. Here are a few common options:

 

• • Selling the Property: If you and other beneficiaries decide to sell, you’ll need to decide how to handle the proceeds. You may choose to split the profits, reinvest in new real estate opportunities, or use the funds for personal endeavors.

• • Reinvesting in Real Estate: If you’re inclined to remain in the real estate market, consider using a 1031 exchange, which allows you to reinvest in another property without incurring capital gains taxes, as long as you follow certain criteria. This can be a smart strategy to grow wealth, especially if you’re interested in San Diego’s promising rental market.

• • Holding and Renting: If the property has good cash flow potential, you might decide to keep it as a rental. This option may require property management or more hands-on involvement, but it offers long-term passive income and potential for property appreciation. San Diego’s multifamily rental market remains strong, making this an appealing choice for those interested in a steady income stream.

Final Thoughts

Inheriting investment properties can open doors to new financial opportunities, but it also requires careful planning. With the right real estate agent and tax professional by your side, you’ll be better equipped to make informed decisions. By evaluating the property’s worth, understanding the tax landscape, and clarifying your goals, you can make the best choice—whether that’s selling, reinvesting, or renting out your San Diego investment property.