Do you pay taxes when you inherit money?

Do you pay taxes when you inherit money?

Usually not, at least not on the inheritance itself. The IRS treats most inherited money and property as a transfer, not income, so simply 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 directly passes to you with no federal tax. Property such as a house, stocks or a retirement account carries its own rules, covered below, because 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 (what the IRS uses to calculate gain or loss when you sell) generally resets to its fair market value on the date the person died, not what they originally paid³.

This is often called a "step-up" in basis, because for assets that gained value over the decedent's lifetime, your new basis is higher than what they paid. In practice this means:

• 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 heirs further: the IRS instructions for Form 8949 direct filers to report a disposition of inherited property "as a long-term gain (or loss) regardless of how long you held the property"⁴. Long-term rates are lower than the ordinary income rates a short-term sale would face.

Do you pay taxes on inheriting a house?

Not for simply 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, separately from any question about the inheritance itself.

For 2026, long-term capital gains are taxed at 0%, 15% or 20% depending on taxable income: 0% up to $48,350 single or $96,700 joint, 20% above roughly $533,400 single or $600,050 joint⁵. A 3.8% Net Investment Income Tax can apply on top for higher earners¹.

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 own¹.
• 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 everything else involved in 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 work differently 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 entire account to be emptied by December 31 of the tenth year after the owner's death; if the original 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 the way traditional IRA withdrawals are.

This has enough penalty risk for a missed withdrawal that it deserves its own reading: see rules for inherited IRA RMDs.

Does your state charge an inheritance tax?

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

Rates and exemptions change over time, so confirm the 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 is different from any state inheritance tax, and most families never encounter it. It is charged to the estate itself 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 but separate 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 still generally 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 individual or a foreign estate must report it on Form 3520, even though no tax is due on the inheritance itself⁹. The threshold aggregates amounts from the same foreign person and related parties, and skipping the form just because no tax is owed can still bring a penalty.

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

1. Get the date-of-death value of what you inherited: 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 with their own tax bill.
3. For a retirement account, confirm whether you are a spouse or non-spouse beneficiary, since the 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 its filing deadline.
5. If the inheritance came from outside the United States and totals more than $100,000 in the year, plan to file Form 3520.
6. Keep the appraisal, statements and any 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 account 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 done at the time of inheritance, whether an account is traditional or Roth, and the CPA or attorney who helped settle the estate. For the accounts you hold today that someone will eventually inherit, a beneficiary designations checklist covers keeping 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 is later sold.
• 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 account 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.