Understanding the Tax Rules for Inherited Property and Assets

13 October 2025

When a loved one leaves you property or assets in their will, you might feel both gratitude and a bit of confusion—especially when it comes to taxes. Inheriting wealth can be a blessing, but it also comes with responsibilities, particularly in terms of tax obligations. If you’re feeling overwhelmed, don’t worry! We’re going to break it all down in simple terms so you can navigate this process with confidence.

Do You Have to Pay Taxes on Inherited Property?

One of the biggest questions people have when inheriting property or assets is: "Do I have to pay taxes on this?" The short answer is—it depends. While inheritance itself isn't taxed at the federal level in the U.S., there are certain scenarios where you might owe taxes.

There are three main types of taxes that could apply to inherited assets:

1. Inheritance Tax (Only in a Few States)
2. Estate Tax (Paid by the Estate Before You Receive the Inheritance)
3. Capital Gains Tax (If You Sell the Property or Assets)

Let’s break these down further.

Understanding Inheritance Tax

An inheritance tax is a state-level tax that you, as the beneficiary, may have to pay when receiving assets. The good news? Most states don’t have this tax. As of now, only six states impose an inheritance tax:

- Iowa (phasing out by 2025)
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania

If you inherit property in one of these states, the tax you owe will depend on your relationship with the deceased. Immediate family members (like spouses and children) often pay little to nothing, while distant relatives or unrelated beneficiaries might owe more.

What About the Federal Estate Tax?

Unlike inheritance tax, an estate tax is paid by the estate before assets are distributed. The federal estate tax only applies to estates valued above $13.61 million (as of 2024). For most people, this won’t be an issue since the threshold is quite high.

However, some states also impose their own estate taxes with lower thresholds. If you’re inheriting from someone in a state with estate taxes (such as Oregon or Massachusetts), it's worth checking local laws to see if the estate was taxed before distribution.

How Capital Gains Tax Affects Inherited Property

Even if you don’t owe inheritance or estate tax, there's another potential tax to consider—capital gains tax. This applies when you sell an inherited property or asset for more than its stepped-up value.

What’s a Step-Up in Basis?

Here’s the good news: when you inherit property, its value is "stepped up" to the fair market value at the time of the original owner’s death. This can significantly reduce the taxable gain if you sell.

For example:
- Say your parents bought a house 30 years ago for $100,000.
- At the time of their passing, the house is worth $500,000.
- Instead of inheriting it at the original $100,000 purchase price, your basis is automatically "stepped up" to $500,000.

Now, if you sell it for $510,000, you only owe capital gains tax on the $10,000 increase—rather than on the full $410,000 gain if you had inherited it at the original cost.

This step-up in basis can save heirs thousands (or even hundreds of thousands) in taxes!

Selling an Inherited Home: What You Need to Know

If you’re planning to sell an inherited property, keep in mind:

- Capital gains taxes apply only if you sell for more than the stepped-up value.
- The holding period is automatically considered long-term, meaning lower tax rates.
- Any improvements made after you inherit can be added to the property’s cost basis, reducing taxable gains.

Tax Rules for Inherited Retirement Accounts (401(k)s, IRAs)

If you inherit a 401(k) or an IRA, the tax rules work differently from real estate. Generally, withdrawals are taxed as ordinary income unless it's a Roth IRA (which is tax-free under most circumstances).

Key Points for Inherited IRAs and 401(k)s:

- Spouses can either roll the account into their own IRA or take minimum distributions.
- Non-spouse heirs must typically withdraw the entire balance within 10 years (for accounts inherited after 2019).
- Withdrawals from Traditional IRAs and 401(k)s are subject to income tax.
- Roth IRAs are tax-free as long as the account was open for at least five years before the original owner’s death.

Understanding these rules can help you avoid unnecessary tax burdens when managing inherited retirement funds.

Inheriting Stocks and Investments: What’s Taxable?

Like real estate, inherited stocks, bonds, and other investments also receive a stepped-up basis. This means taxes are only owed on gains occurring after you inherit the assets.

For instance:

- If your grandfather bought Apple stock for $10 per share and at the time of his passing, it’s worth $150 per share, your new cost basis is $150 per share.
- If you sell the stock at $160 per share, you’ll only owe capital gains tax on the $10 profit, not the full gain from the original purchase price.

This step-up rule applies to nearly all inherited investments, including stocks, mutual funds, and ETFs.

How to Minimize Taxes on an Inherited Property or Asset

Nobody wants to pay more taxes than necessary, so here are a few strategies to reduce your tax burden:

1. Hold Onto the Property Until You're Ready to Sell
- If market conditions aren’t great, consider waiting before selling. Since inherited assets get a step-up in basis, any appreciation after inheritance is what’s taxable.

2. Convert an Inherited Home into a Primary Residence
- If you live in the inherited home for at least two years, you may qualify for the $250,000 (single) or $500,000 (married) capital gains exclusion.

3. Use a Charitable Trust
- If you have highly appreciated inherited assets, donating them to a charitable trust can provide tax benefits while supporting a good cause.

4. Consider a 1031 Exchange for Real Estate
- If you plan to sell and reinvest in a new property, a 1031 exchange can help defer capital gains taxes.

Final Thoughts

Inheriting property or assets can be both a financial gift and a tax headache. The key takeaway? Federal estate taxes rarely apply, but capital gains tax and state inheritance taxes might. The step-up in basis is your best friend for minimizing taxes when selling inherited assets.

If you're unsure about your specific situation, it’s always wise to consult with a tax professional. They can help you navigate complex tax codes and ensure you make the most tax-efficient decisions with your inheritance.