Taxes When You Inherit Money or Property

Inheriting money or property is an emotionally complex event, and the tax consequences can add another layer of complexity if you're not prepared. The good news is that in most cases, the inheritance itself isn't immediately taxable — but what you do with it afterward, and the income it generates, can be.

The foundation of inheritance taxation is the stepped-up basis rule: when you inherit an asset like stocks, real estate, or a business interest, your tax basis in that asset is "stepped up" to the fair market value at the time of the original owner's death (or an alternate valuation date). This means that if you inherit stock that your parent bought for $10,000 and it's worth $100,000 at their death, your basis is $100,000 — not $10,000. If you sell it immediately, you owe no capital gains tax. If you hold it and it grows to $120,000, you only owe capital gains tax on the $20,000 of appreciation that occurred after you inherited it. The stepped-up basis is one of the most valuable tax benefits in the entire code, potentially eliminating a lifetime of embedded capital gains at death.

Inherited retirement accounts are treated very differently. When you inherit a traditional IRA or 401(k) from someone other than your spouse, you generally must take distributions and fully empty the account within 10 years of the original owner's death (under the SECURE Act 2.0 rules). All distributions are taxed as ordinary income when you take them. A spouse who inherits an IRA has more flexibility — they can treat it as their own IRA, delay distributions, and defer taxes further. Inherited Roth IRA distributions are generally tax-free if the original owner had the account for at least five years, though the 10-year distribution rule still applies.

If you inherit real estate, the stepped-up basis applies there too — your basis is the fair market value at the date of death. If you rent out inherited property, the rental income is taxable, and you can claim depreciation based on the new stepped-up value, which can shelter some of that income. If you sell inherited real estate shortly after receiving it and the sale price is close to the stepped-up basis, the gain will be small or zero. If the property has appreciated significantly since the death date, the gain above your stepped-up basis is taxed as a long-term capital gain regardless of how long you personally held it — an important exception to the usual holding period rules.

If the estate is large enough to owe federal estate tax (over $13.61 million in 2024), that tax is paid by the estate — not by the beneficiaries personally. Six states also impose a state-level inheritance tax directly on beneficiaries, with rates and exemptions that depend on your relationship to the deceased. You may receive a Form K-1 from the estate if you're a beneficiary and the estate earned income during its administration — that income must be reported on your personal return.