Do you pay taxes when you inherit money?

Do you pay taxes when you inherit money?

Usually not. The IRS treats most inherited money and property as a transfer, not income, so receiving it does not create a federal tax bill¹.

What can create a tax bill is what happens next:

• Selling an inherited asset for more than its value on the date of death.
• Withdrawing money from an inherited retirement account, which was never taxed to begin with.
• Earning interest, dividends or rent on inherited property after you receive it.
• Living in a state that charges its own inheritance or estate tax.

Cash you inherit passes to you with no federal tax. Property such as a house, stocks or a retirement account carries its own rules, covered below, since the "basis" the IRS uses to measure gain works differently for each.

What is the "stepped-up basis," and why does it matter?

When you inherit an asset like a house, stocks or a business interest, your basis (used to calculate gain or loss when you sell) generally resets to its fair market value on the date of death, not what the person originally paid³.

This "step-up" in basis means an asset that gained value over the decedent's lifetime gets a new, higher basis. In practice:

• If you sell the asset soon after inheriting it, for close to its date-of-death value, you owe little or no capital gains tax.
• If it grows in value after you inherit it and you later sell, you owe tax only on the growth that happened after the date of death.
• If the asset lost value before the death, the basis steps down instead of up.

A separate rule helps further: IRS instructions for Form 8949 direct filers to report inherited property "as a long-term gain (or loss) regardless of how long you held the property"⁴, taxed at lower rates than a short-term sale would face.

Does community property change the step-up?

In nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), a surviving spouse gets a bigger benefit: both halves of the community property, not just the half the deceased spouse owned, get a new fair-market-value basis, as long as at least half the property is included in the deceased spouse's estate¹⁸. Separate property does not get this double step-up. See our step-up in basis guide for how the calculation works.

Do you pay taxes on inheriting a house?

Not for receiving it. You owe federal tax only if you later sell the house for more than its stepped-up basis, and only on the difference. Rental income the house earns while you hold it is taxable each year, separate from the inheritance itself.

For 2026, long-term capital gains are taxed at 0%, 15% or 20% depending on taxable income: 0% up to $49,450 single or $98,900 joint, 15% up to $545,500 single or $613,700 joint, and 20% above that¹⁵. A 3.8% Net Investment Income Tax can also apply on top, once modified adjusted gross income passes $200,000 single or $250,000 married filing jointly; these thresholds are fixed by law and are not adjusted for inflation¹⁶.

A few things that trip people up on an inherited house:

• The $250,000/$500,000 home-sale exclusion only applies if you live in the house as your main home for at least two of the five years before selling; inheriting it does not count on its own¹⁷.
• If several siblings inherit a house together, each one's basis and gain is calculated on their own share.
• A state inheritance tax (see below) can apply to real estate even though there is no federal inheritance tax.

For more on keeping or selling a parent's house, see what to do with a house after a parent dies.

What about inherited retirement accounts?

Retirement accounts differ because the money in them was never taxed. A traditional IRA or 401(k) holds "income in respect of a decedent," meaning the tax the original owner deferred is still owed by whoever inherits it².

For most people who inherit an IRA from someone other than a spouse, the SECURE Act's 10-year rule requires the account to be emptied by December 31 of the tenth year after death; if the owner had already started required withdrawals, annual withdrawals during those 10 years are also required⁸. A surviving spouse has more options, including treating the IRA as their own. Roth IRAs follow the same 10-year rule, but qualified withdrawals are not taxed.

Missing a withdrawal here carries real penalty risk: see rules for inherited IRA RMDs.

What about life insurance and savings bonds?

Two more inherited assets follow their own rules.

See how to file taxes for a deceased person for that election.

Does your state charge an inheritance tax?

Separately from the IRS, five states charge their own inheritance tax, based on your relationship to the decedent, often owed by the heir, not the estate.

Rates and exemptions change, so confirm current numbers before you file. The full state-by-state picture, including states with a separate estate tax, is in inheritance tax by state.

What about the federal estate tax?

The federal estate tax differs from any state inheritance tax, and most families never encounter it. It is charged to the estate before anything is distributed, and only when the estate is large. For deaths in 2026, a federal estate tax return is required only if the gross estate, plus certain lifetime gifts, exceeds $15,000,000, the IRS's basic exclusion amount, due nine months after death⁶,¹. Below that, no return is required and heirs owe nothing toward it.

A related rule covers lifetime giving: anyone can give up to $19,000 to any other person in 2026 without using any lifetime exemption or filing a gift tax return¹.

What if the inheritance comes from a foreign estate?

Money or property inherited from someone who lived outside the United States is generally still not taxable income to you, but it can trigger a reporting requirement. A US person who receives more than $100,000 in a year from a nonresident alien or a foreign estate must report it on Form 3520, even though no tax is due⁹. The threshold aggregates amounts from the same foreign person and related parties, and skipping the form because no tax is owed can still bring a penalty.

Can you refuse, or "disclaim," an inheritance?

Yes. A qualified disclaimer lets you refuse an inheritance so that, for tax purposes, you are treated as if you never received it. The refusal must be in writing, received within 9 months of the death, made before you accept the property or any benefit from it, and the property must pass to someone else without direction from you²¹. People disclaim to avoid pushing a large inheritance into their own taxable estate. Talk to an estate attorney before the window closes.

Step by step: what to do when you inherit money or property

1. Get the date-of-death value: an appraisal for real estate, a statement for investment accounts.
2. Sort it into categories: cash, property with a stepped-up basis, and tax-deferred retirement accounts.
3. For a retirement account, confirm whether you are a spouse or non-spouse beneficiary, since withdrawal rules and deadlines differ.
4. Check whether your state, or the state where inherited real estate sits, charges its own inheritance tax, and note the filing deadline.
5. If the inheritance came from outside the United States and totals more than $100,000, plan to file Form 3520.
6. Keep the appraisal, statements and tax forms with your other estate paperwork, not only in memory or email.
7. Talk to a CPA before selling a large asset or taking a big retirement withdrawal, since timing can change the tax owed.

What should you record in a family guide?

The paperwork trail matters more than the amount. Trouble usually comes from heirs who cannot find the date-of-death value, the account statements, or which retirement accounts even exist. Worth recording in one place: a list of accounts and where they are held, the location of any appraisal, whether an account is traditional or Roth, and the CPA or attorney who helped settle the estate. For accounts you hold today that someone will eventually inherit, a beneficiary designations checklist keeps those current.

What mistakes do people cause with inherited money and taxes?

• Reporting an inherited check as income on a personal return when it was not income at all.
• Cashing out an inherited retirement account and being surprised by the tax bill.
• Missing the 10-year window, or an annual withdrawal inside it, on an inherited IRA.
• Skipping a date-of-death appraisal, then struggling to prove the stepped-up basis when the asset sells.
• Assuming there is a federal inheritance tax and delaying a simple transfer out of unnecessary worry.
• Missing a state's separate inheritance tax filing deadline.
• Ignoring a foreign inheritance because no tax is due, and missing the Form 3520 requirement anyway.

When to get professional help

Talk to a CPA before selling a significant inherited asset, taking a large retirement withdrawal, or filing a state inheritance tax return, since timing and elections change what you owe. Bring in an estate attorney if the inheritance is tied up in a will contest, a trust, or property in more than one state. For a foreign estate, use a tax professional experienced in international reporting before the Form 3520 deadline.