Using a promissory note to buy out a sibling's share of inherited property

One of you wants to keep the family house. The others want the value of their shares. A sibling buyout settles it: the sibling keeping the property signs a promissory note for the others' shares and pays them over time, and nobody is forced to sell the house their parents left behind. Done on proper paper, this works well. Done on a handshake, it produces some of the ugliest family fights probate lawyers ever see.

Agree on a value before anything else

Order an appraisal from a licensed appraiser, which typically costs a few hundred dollars, and agree in advance that everyone will accept the number. If trust runs thin, each side can order its own appraisal and split the difference. Say the house appraises at $360,000 and three siblings inherit it equally. Each share is worth $120,000, so the sibling keeping the house owes the other two $240,000 in total, minus adjustments for any mortgage balance the keeper is taking over. Put that arithmetic on one page and have every sibling initial it. Most buyout disputes begin with a number somebody never actually agreed to.

Use an installment note with real terms

The buyout note is almost always an installment note: a fixed schedule of monthly payments over five, ten, or fifteen years, amortized like a small mortgage. If full amortization makes the payment too large, a common compromise is a modest monthly payment with a balloon due when the keeper refinances or sells. Our loan payoff calculator shows what different terms do to the monthly number, which gives the family real figures to negotiate around. Write the first payment date, the schedule, and the final maturity date into the note itself, and name every sibling who is owed money as a payee.

Secure the note with the house itself

An unsecured promise from a sibling is a hope, and hopes do not survive refinances, remarriages, or bankruptcies. Make it a secured note backed by the property, with the selling siblings holding a deed of trust or a mortgage, exactly the way a bank would. In California and much of the West, the instrument is a deed of trust; most eastern states use a mortgage. Either way, the siblings receiving payments hold a lien on the house. If the keeper later sells or refinances, that lien gets paid at closing before anyone else sees a dollar.

Charge interest, and let the IRS set the floor

The Internal Revenue Service (IRS) publishes the applicable federal rate (AFR) every month in a revenue ruling, and that rate is the minimum a family note should charge. Charge less and the IRS can treat the missing interest as if it were paid anyway: taxable interest income to the selling siblings, plus a gift from them back to the keeper. The current tables sit on the IRS website; use the long-term rate for a note running more than nine years, and state the rate in the note on the day everyone signs. The annual gift tax exclusion, $19,000 per recipient in 2026, gives families room to forgive amounts later if they choose. Starting below the AFR, though, builds a tax problem into the deal from day one. On the other end, state caps limit how much interest anyone may charge, and our usury limit checker will flag a rate that crosses the line.

During probate or after distribution

Timing changes the mechanics. While the estate is open, the personal representative can build the buyout into the distribution plan, often called a non pro rata distribution: the estate deeds the house to the keeper, and the other siblings receive the note and the lien in place of their share of the property. Many states want probate court approval for that arrangement, and the estate attorney should draft or review it. If the estate has already closed and the siblings hold title together, the buyout becomes an ordinary co-owner sale: the keeper signs the note and the security instrument, and the sellers deed their interests over. Both routes work. The probate route usually produces cleaner title and fewer transfer tax questions.

Record the deed of trust or mortgage

Sign the security instrument before a notary, then record it at the recorder's office in the county where the property sits. The fee is modest, usually well under $100. Recording makes the lien public, and public is what protects the selling siblings: a title company running a search before any future sale or refinance will find the lien and require a payoff. Families skip this step because it feels excessive among relatives. It is the one step you should never skip. An unrecorded lien can be wiped out by a later lender who had no way to know it existed.

A note on taxes beyond the interest

Inherited property generally takes a stepped-up basis, meaning its tax value resets to the date-of-death value. For the selling siblings, that usually makes the principal portion of each payment a return of their own basis, with little or no capital gain, while the interest portion is ordinary income they report each year. The keeper cannot deduct the interest unless the debt qualifies as home acquisition debt and is properly secured and recorded, which is one more reason to record. None of this is exotic. Still, have a tax preparer look at the structure before anyone signs.

If the payments stop

Nobody wants to foreclose on a brother or send a demand letter to a sister. Write the note so the family never has to make that decision in anger: a grace period on each payment, a written notice of default, and a cure window of 15 or 30 days give everyone a script to follow before feelings take over. If a default truly sticks, the recorded lien lets the selling siblings foreclose the way any lender would, and that leverage alone usually gets payments moving again. Keep one more piece of paper as you go: a shared payment ledger, updated with every payment, so nobody argues in five years about what was handed over in cash at Thanksgiving.

Sources

• IRS, Applicable Federal Rates
• IRS, Frequently asked questions on gift taxes