Inheriting a House with Equity Release – What You Need to Know

Receiving real estate as an inheritance is usually associated with a sense of financial security and the continuation of a family tradition. However, Polish heirs are increasingly facing unexpected situations — it turns out that the inherited house is burdened with a so-called reverse mortgage, or the deceased had entered into a life estate agreement. Inheriting a house with equity release is a reality faced by a growing number of families, and a lack of knowledge on this subject may lead to costly mistakes and unnecessary stress.

In this guide, we will discuss all aspects of this complex issue — from the mechanisms behind equity release arrangements to practical notarial and tax-related steps. We invite you to continue reading!

What is equity release and how does it affect inheritance?

The term “equity release” is a broad concept which in Poland is most commonly implemented in two forms. Both allow seniors to obtain additional funds from the wealth tied up in their real estate without having to move out.

• Reverse mortgage (offered by banks) – this is a legally regulated financial product. A senior takes out a loan secured by a mortgage on their property but does not make monthly repayments. Repayment of the principal together with interest is deferred until their death. Interest is added to the loan balance (compound interest). In this situation, the family inherits the house, but also a significant debt towards the bank.
• Life annuity / lifetime care agreement (offered by mortgage funds or private individuals) – this involves a notarised transfer of ownership of the property to an institution in exchange for lifelong monthly payments and the right to live in the property for life. In this case, the property does not form part of the estate at all – the heirs do not inherit the house, as the deceased ceased to be its owner at the moment the agreement was signed.

It should be noted that inheriting a property subject to an equity release arrangement (inheriting a house with equity release) is only possible in the case of a reverse mortgage. In such a situation, the property remains the borrower’s ownership and forms part of the estate, although it is encumbered with a debt towards the bank, which the heirs may repay in order to retain ownership.

By contrast, in the case of a life annuity or lifetime care agreement, the property does not form part of the estate, as ownership is transferred to the purchaser during the lifetime of the transferor. Consequently, the heirs do not, as a rule, inherit the property as part of the estate.

First steps after discovering a property encumbrance

The moment when it is discovered that an inherited property is encumbered with a loan and a financial institution’s entry often occurs only when reviewing documents. Quick and methodical action is of great importance here..

Verifying the legal status should be an absolute priority:

• Land and Mortgage Register (Sections III and IV) – these can be checked free of charge via the online system of the Ministry of Justice, provided the register number is known. Section IV will show the bank’s mortgage. In the case of a lifetime care agreement, the current owner will be listed in Section II, while Section III will disclose the right of lifetime care (a claim to lifelong maintenance and housing)..
• Reviewing documents – locating the original reverse mortgage agreement will reveal the rules for interest accrual and the settlement schedule after death.
• Contacting the bank – notifying the financial institution of the borrower’s death by submitting a certified copy of the death certificate is a family obligation. From that moment, the bank suspends further disbursements (if any were made), and the statutory process of settling the agreement begins.

Under the Polish Act on Reverse Mortgage, heirs generally have a statutory time limit to decide on and settle the obligation after the borrower’s death, arising from the provisions of the Act and the terms of the agreement (in practice, a period of up to 12 months is most often assumed as a standard settlement timeframe). Until the estate matters are formally resolved, the family should ensure that ongoing bills and property insurance are paid.

Options available to heirs in Poland

Polish regulations strictly define the procedures available to heirs in the case of a reverse mortgage. The family does not lose the home overnight.

Option 1 – Repayment of the debt and keeping the home

If the family has sufficient financial resources or the ability to obtain a standard mortgage loan, it may repay the bank the entire amount (principal + interest) in a lump sum. The advantage of this solution is keeping the property within the family.

Option 2 – Independent sale and debt repayment

Heirs may sell the property within a reasonable timeframe, repay the debt to the bank, and divide the remaining amount (the so-called surplus) among themselves. This is the most financially beneficial solution when there is no intention to keep the home.

Option 3 – settlement using the property

If the heirs do not repay the debt within the prescribed period, the creditor is entitled to satisfy its claim from the property. In such a case, the institution carries out a valuation of the property with the involvement of a certified appraiser. The debt is covered from the value obtained, and any remaining surplus is paid out to the heirs.

It is also important to remember a key mechanism under Polish inheritance law – acceptance of inheritance with the benefit of inventory. If the family does not reject the inheritance within six months, it is deemed accepted with liability limited to the value of the net estate (assets) determined in the inventory list or estate schedule. This protects heirs from liability with their personal assets if the debt arising from the reverse mortgage exceeds the value of the property itself.

Tax and legal aspects in Poland

Settling the inheritance of a house subject to an equity release arrangement (inheriting a house with equity release) in Poland requires formal procedures to be completed with the Tax Office.

Inheritance and gift tax

Close family members (the so-called “zero tax group”: spouse, children, grandchildren, parents, siblings) may be fully exempt from inheritance tax. The condition is that the acquisition of the inheritance must be reported to the Tax Office using form SD-Z2 within 6 months from the date the court decision becomes final or the notarial deed confirming inheritance is registered. If the inheritance is received by more distant relatives, tax is paid on the so-called net value of the inheritance (the value of the acquired assets minus debts and encumbrances). This means that the debt arising from a reverse mortgage reduces the tax base.

Personal income tax on the sale of real estate (19%)

A common mistake is the concern about quickly selling an inherited property in order to repay the bank. In Poland, there is an exemption from 19% personal income tax (PIT) if the sale takes place after 5 years (counted from the end of the calendar year in which the property was acquired). Importantly, this 5-year period is generally counted from the moment the deceased acquired or built the property, rather than from the date of their death. As a result, in many cases heirs may sell the property without paying income tax, provided that this time condition is met.

Practical notarial steps – action timeline

In order to freely dispose of an inherited property (e.g. put it up for sale in order to repay the bank), the family must formally acquire rights to it.

Stage 1: Confirmation of inheritance acquisition

This can be done in two ways:

• Faster route: preparation of a notarial deed of certification of inheritance (APD – Act of Inheritance Certificate). This requires the simultaneous presence of all statutory and testamentary heirs. The process can be completed within a few days.
• Longer route: filing an application with the court for confirmation of inheritance acquisition. This option is necessary if there is a dispute within the family or not all heirs can attend. It usually takes several months.

Stage 2: Division of the estate (optional)

If there are multiple heirs, the house becomes co-owned by them by operation of law. They may either sell it jointly or carry out a “division of the estate,” whereby one heir takes over the property with the obligation to compensate the others and to settle the reverse mortgage with the bank.

Stage 3: Contact with the bank and settlement

Once the heirs obtain the APD or a final court decision, they inform the bank about who has taken over the debt and how they intend to settle the obligation within the statutory timeframe of 12 months.

Inheriting a house with equity release – how to avoid problems?

The best way to avoid the shock of unexpectedly inheriting a property subject to an equity release arrangement (inheriting a house with equity release) is transparency.

Conversations about finances with seniors can be difficult, but openly asking whether they are managing the costs of maintaining a large house is an expression of care. Sometimes a better solution for the family is to help the senior downsize to a smaller, more affordable property, or for siblings to collectively contribute to a monthly supplement to the parent’s pension. This way, the property remains fully owned by the family, without institutional encumbrances.