Do you pay taxes on inheritance?

So, do you pay taxes on inheritance?

For most people, no. The IRS treats an inheritance as a transfer of property, not income, so receiving money, a house or an investment account from someone who died does not by itself create a federal tax bill¹. You do not report the value of what you inherited on your Form 1040.

What can create a tax bill is what happens next, or where the person who died was legally domiciled:

• You sell an inherited asset for more than its value on the date of death.
• You withdraw money from an inherited retirement account that was never taxed to begin with.
• The inherited property earns interest, dividends or rent after you receive it.
• The person who died lived in one of the five states that charge their own inheritance tax.
• The estate itself owed federal or state estate tax before anything was distributed to you.

Cash you inherit directly, and most property you simply hold onto, passes to you with no federal income tax. The rules differ by the type of asset, covered step by step below.

Why isn't an inheritance taxed like a paycheck?

Section 102 of the federal tax code excludes property received by gift, bequest, devise or inheritance from the recipient's gross income, unlike a paycheck, a lottery prize or self-employment income¹. The exclusion covers the inherited property itself, not income it produces after you own it: if you inherit a rental house, the house's value is not taxed, but the rent you collect starting the month you inherit it is ordinary income.

Does inheriting a house mean you owe taxes on it?

Not when you receive it. You may owe tax later if you sell it for more than its value on the date the person died. Inherited real estate gets a "stepped-up basis," meaning your cost basis for tax purposes resets to the property's fair market value on the date of death rather than what the original owner paid decades earlier³.

Example: a parent bought a house for $60,000 in 1985. It is worth $420,000 on the date they die. Their child inherits it and sells it a year later for $430,000. The taxable gain is $10,000 ($430,000 minus the $420,000 stepped-up basis), not $370,000. Any sale of inherited property is treated as a long-term capital gain or loss regardless of how long you actually held it⁴.

If you keep the house or rent it out, there is no tax from the inheritance itself. Rental income and any future sale are taxed under the normal rules for that kind of property.

Do you owe taxes on an inherited retirement account?

Yes, eventually. Traditional IRAs and 401(k)s hold money that was never taxed, so when you, the beneficiary, withdraw it, that withdrawal is ordinary income in the year you take it⁷.

Most non-spouse beneficiaries must empty an inherited IRA within 10 years of the death. Whether you also owe an annual required minimum distribution during those 10 years depends on whether the original owner had already started taking RMDs before they died; missing one can trigger a 25% excise tax on the amount you should have taken⁷. Qualified withdrawals from an inherited Roth IRA are generally tax-free, though the 10-year emptying rule still applies. See our rules for inherited IRA RMDs guide for the full breakdown by beneficiary type.

Do you owe federal estate tax on what you inherit?

Almost certainly not, and if you did, it would not be your bill. The federal estate tax is charged to the estate itself, before anything is distributed to heirs, and only when the total value of everything the person owned is above the filing threshold: $15,000,000 per person for deaths in 2026⁶.

Gift tax is a related but separate system, also generally paid by the giver, not the receiver. For 2026 an individual can give up to $19,000 to any one person without filing a gift tax return, and lifetime gifts count against the same $15,000,000 exclusion used for the estate tax⁶.

Which states tax the person who inherits?

Five states charge an inheritance tax directly to the heir, separate from any federal rule: Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania⁹. Whether you owe it depends on the deceased person's state of legal residence, not yours, and how closely you were related to them. A surviving spouse is exempt in every one of these states.

Maryland is the only state that charges both an inheritance tax and a separate estate tax on the same estate⁹. Twelve other states plus the District of Columbia charge an estate tax instead, which comes out of the estate before you receive anything, so it does not show up as your bill⁹. Iowa repealed its inheritance tax for deaths on or after January 1, 2025¹¹. These rates change, so confirm the current numbers on the state's own revenue site. For the full picture, see our inheritance tax by state guide.

Do you owe tax on an inheritance from overseas?

Receiving money or property from a relative who died outside the United States is not itself taxed by the IRS. But if the total you receive from a nonresident alien individual or a foreign estate is more than $100,000 in a year, you must report it on Form 3520, identifying each gift over $5,000 separately⁸. This is an information return, not a tax bill, but penalties for skipping it can be significant. A much lower threshold applies to gifts that purport to come from a foreign corporation or partnership.

Checklist: figuring out what you owe

1. Confirm what you inherited: cash, a house, an investment account, a retirement account, or a mix.
2. Get the fair market value of real estate or investments as of the date of death; this becomes your stepped-up basis.
3. Check whether a retirement account is traditional or Roth, and who the original owner was.
4. Find out where the person who died was legally domiciled at death.
5. If that state is Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania, check your relationship class on that state's revenue department site.
6. Keep the date-of-death appraisal with your tax records if you plan to sell inherited property.
7. Note the 10-year deadline, or annual RMD requirement, for any retirement account⁷.
8. Talk to a tax preparer about Form 3520 if the gift came from overseas and exceeds $100,000.
9. Ask the executor for a copy of any estate tax return filed.

What should you record in a family guide?

The details that matter for inheritance tax are hard to reconstruct after someone dies, and easy to record while they are still alive. A family guide, like the one Omliva helps a family put together, is a natural place to keep:

• The state where each account or property is legally based, and the account owner's state of residence.
• Whether retirement accounts are traditional or Roth, and roughly when required distributions started, if any.
• Purchase price and date for real estate and major investments, with a recent value estimate, as a starting point for a future stepped-up basis.
• The name and contact information of any accountant or estate attorney the person already works with.
• Notes on any foreign accounts, property or relatives, which can trigger separate reporting rules.

Keeping this in one place saves the executor and heirs from tracking down decades-old records under time pressure. See our inheriting money and taxes guide for more on what documentation matters most.

What mistakes do people commonly make?

• Assuming no tax return is ever needed. A large foreign inheritance, a retirement account withdrawal or a property sale can still require a filing.
• Confusing estate tax with inheritance tax. Only five states tax the heir directly; other "estate tax states" bill the estate, not you.
• Missing the inherited IRA's 10-year deadline, or skipping a required annual distribution, which can trigger a 25% excise tax on the missed amount⁷.
• Losing the date-of-death valuation. Without it, you cannot prove the stepped-up basis when you sell, and an audit may assume a lower basis and a bigger taxable gain.
• Assuming your own state's rules apply. Inheritance tax is based on the deceased person's state of residence, not yours.

When to get professional help

A straightforward inheritance, cash, a modest house, a standard IRA, does not require a lawyer or accountant to receive it. Bring in a CPA to plan an inherited retirement account withdrawal, document basis before a property sale, or when the estate nears the federal estate tax threshold. Bring in an estate attorney if the relationship class in an inheritance-tax state is unclear, or a trust, business or multi-state property is involved.