Inheriting a Low Property Tax Bill Is Getting Much More Complicated

When Willa Staats and her brother inherited their father’s home and adjacent lot in East Austin, TX, they expected to build their lives there.

But one year later, they were hit with a combined property tax bill of $48,000—nearly 90% more than their father had last paid.

Their experience points to a growing fault line in the Great Wealth Transfer: Older Americans are expected to pass down trillions of dollars in housing wealth in the coming decades, but the property tax protections that helped make those homes affordable aren't always handed down with them.

And when those protections fall away, heirs can suddenly be exposed to years of accumulated appreciation all at once.

Where inheriting a home can come with a bigger tax bill

In most states, inheriting a home may trigger the loss of exemptions tied specifically to the previous owner (like as a senior freeze or circuit breaker) but the property is not automatically reassessed at its current market value simply because its owner died.

A smaller group of states operates differently, though.

In California, Florida, Maryland, Michigan, New Mexico, South Carolina, and Texas, a transfer can cause a home to lose some or all of the assessment protections that kept the previous owner’s tax bill stable.

This is exactly what happened to Staats and her brother.

Their father had owned the East Austin properties since 1999, before the surrounding neighborhood became one of the city’s most sought after (and expensive). Over that time, Texas’ homestead appraisal cap limited how quickly the taxable value of his home could rise, even as its market value skyrocketed.

By the time the properties passed to his children, the gap between what they were worth and the value on which their father had been taxed had grown enormous.

California offers an even starker version of the same problem.

Under Proposition 13, longtime homeowners can end up paying taxes on assessed values far below current market prices—a benefit valuable enough to create its own lock-in effect, discouraging some owners from moving and giving up their protected tax basis.

For years, those protections could also pass relatively freely to heirs. But Proposition 19, approved by voters in 2020, sharply narrowed that inheritance break.

Now, to qualify, at least one eligible child generally must make the property their principal residence. If the heir is not an eligible child, or plans to keep the property as a rental or vacation home, the benefits are lost.

So while the mechanics differ from state to state, the underlying problem is the same: An heir can receive the same house a parent could comfortably own without the tax treatment that helped make it affordable.

What happens if you can't afford the taxes?

For heirs, that can create an immediate cash-flow problem. No matter how valuable the home is, the tax bill still has to be paid in cash.

Staats ran headlong into that bind.

As a recent law school grad, she was earning just $80,000 when she and her brother received their first combined property tax bill of roughly $48,000. Her brother and his wife had no income at the time, and their father had left behind little liquid wealth to help carry the properties

“We inherited nothing else,” Staats told Realtor.com® in March. “There was maybe $15,000 in cash accounts for my dad. He had no retirement, no life insurance.”

To cover the property taxes and remaining mortgages, the siblings sold the adjacent commercial parcel for more than $2 million.

The sale gave them the cash they needed, but it also made the main home—where the siblings were living—harder to afford. The parcel had generated rental income, and selling it cut off plumbing and water access to structures behind the main house—undermining some of the ways the family had hoped to make the remaining property pay for itself.

They explored leasing the house and making other changes that could offset the higher taxes, but those plans required significant upfront investment of their own.

“I just can't spend $250,000 to start saving $20,000 a year,” Staats said.

And so their choices narrowed quickly: find more income, borrow against the property, or sell.

In May of this year, the siblings sold the primary home, too.