A parent or relative sold a house years ago and carried the loan. Now they've passed, and the payments are coming to you, or to the estate. You may not want to collect checks for the next 15 years. You may need to split the money with brothers and sisters. Selling the note is one way to settle it.
This article covers who can sell an inherited note, what a buyer will ask for, and how taxes work.
Short version: Keep the payments coming in. Figure out who has the legal right to sign. Then decide whether to keep, split, or sell.
Step 1: Keep the payments coming
The first job is simple and important. Make sure the payer knows where to send payments now. A short, friendly letter works. Tell them who to pay and how.
Missed or confused payments hurt the note's value fast. A payer who hasn't heard from anyone may just stop paying. Keep a log of every payment from the date of death on.
Step 2: Find the paperwork
Look through the family's files for:
- The promissory note. The signed IOU. The original matters most.
- The mortgage, deed of trust, or land contract. The document tied to the property.
- The closing statement from the original sale.
- Payment records. Ledgers, bank statements, or a servicer's reports.
- Tax returns showing the installment sale (Form 6252). These help with taxes later.
Can't find the original note? It happens. There are ways to handle a lost note, often with a sworn statement called a lost note affidavit. Tell the buyer early.
Step 3: Figure out who can sign
This is where most inherited note sales get stuck. A buyer needs to know who has the legal right to sell.
- If the estate is open in probate, the executor or personal representative usually signs for the estate. They'll need the court paper that names them. In Ohio and Indiana, this is usually called letters of authority or letters testamentary.
- If the note was already passed to heirs, the heirs who now own it sign together, with proof that it was transferred to them.
- If the note was in a trust, the trustee usually signs, with a copy of the trust pages that give them that power.
A note buyer will also ask for a death certificate. If you're not sure which of these fits, a probate attorney can tell you quickly.
Step 4: Decide what to do with it
You have three main choices.
Keep it and collect
If the payer is reliable and nobody needs cash, keeping the note gives steady income. If several heirs share it, a licensed loan servicer can collect the payments and split them. That keeps records clean and keeps family out of it.
Sell it all and split the cash
This is the most common choice for estates. One check, split by the will or the court. Nobody has to manage a loan for years. It's often the fastest way to close an estate.
Sell part of it
You can sell the next several years of payments and keep the rest. This can work if heirs want some cash now and some income later. See how partial sales work.
How taxes work on an inherited note
This part surprises people. With most inherited property, the tax basis "steps up" to its value at death. Installment notes are different.
Under IRS Publication 537, passing the note to heirs at death isn't treated as a sale. Instead, whoever receives the note is taxed on the payments the same way the original seller would have been. Tax pros call this "income in respect of a decedent."
What that means for you:
- If you keep collecting, you report the profit part of each payment, plus the interest, just like your parent did.
- If you sell the note, you figure a gain or loss using the same basis your parent had in the note. The untaxed profit from the original sale doesn't disappear.
- There may be a deduction if the estate paid estate tax. Most estates don't owe estate tax, but ask.
Get last year's tax return and the Form 6252 your parent filed. Your CPA needs them. For more on how the gain is figured, read taxes when you sell an owner-financed note.
What a note buyer will ask for
Expect a buyer to ask for:
- The original note, or a lost note affidavit
- The recorded mortgage, deed of trust, or land contract
- A death certificate
- The court paper naming the executor, or proof of who inherited the note
- Payment history, including payments since the date of death
The buyer will also order a title search and a property value check, and confirm the balance with the payer. Most sales close in about four to five weeks once the paperwork is in hand.
Splitting fairly among heirs
Money splits families. A few things help:
- Get a written quote so everyone sees the same number.
- Compare it to keeping the note using the note value calculator.
- Let the executor or an attorney handle the split. It keeps things neutral.
- Decide together whether to sell all or part. One heir may want cash. Another may want income. A partial sale can sometimes do both.
Frequently asked questions
Can I sell a mortgage note I inherited?
Yes. You'll need to show you have the legal right to sign, usually through probate papers or proof the note was passed to you.
Do inherited notes get a step-up in basis?
Generally, no. Under IRS rules, the heir is taxed on the payments the same way the original seller would have been. Talk to a CPA about your situation.
What if we can't find the original note?
It can often still be sold. A lost note affidavit is a common fix. Tell the buyer up front.
Who collects the payments while the estate is open?
Usually the executor or personal representative. Have payments go into an estate bank account and keep records.
How long does it take to sell an inherited note?
Once you know who can sign and have the paperwork, most sales close in about four to five weeks.
Settling an estate with a note in it? I'm glad to look at the numbers with you. Get a free, no-obligation quote, or call me at 513-301-1468.
Larry has invested in real estate since 2006 and has bought more than 300 mortgage notes. He runs LJH Investments, LLC, an Ohio company based in Madison, Indiana. More about Larry
This article is general information, not legal or tax advice. Laws change. Talk with your own attorney and tax adviser about your situation.