Inheriting property is generally not a taxable event, so the real question is how to avoid paying taxes on inherited property when you later sell it, draw from it, or pass it on. Federal law excludes inherited assets from gross income, which means the house, brokerage account, or cash you receive is yours without a tax bill attached. The exposure comes later, and almost every strategy worth knowing targets one of three pressure points: the capital gains tax you may owe when you sell, the ordinary income tax built into inherited retirement accounts, and state-level taxes that can hit even modest estates.
Use the Step-Up in Basis
The step-up in basis is the most valuable tax rule for anyone inheriting property. When someone dies, the tax basis of their assets resets to the fair market value on the date of death. All the appreciation that built up during the decedent’s lifetime is wiped out for tax purposes.
A simple example shows the scale. If your parent bought a home in 1990 for $100,000 and it was worth $500,000 the day they died, your basis is $500,000. Sell it for $510,000 and your taxable gain is $10,000. Without the step-up, you would be taxed on $410,000. The same reset applies to stocks, mutual funds, business interests, and most other capital assets.
In limited cases, an executor who files a federal estate tax return can elect an alternative valuation date six months after death, if that lowers the estate’s total value. For most heirs the date-of-death value is what matters, and selling soon after inheriting is one of the cleanest ways to pay little or nothing in capital gains tax.
Document the Date-of-Death Value
The step-up only protects you if you can prove what the property was worth on the date of death. For real estate, that generally means ordering a professional appraisal dated close to the death. For publicly traded securities, use the closing price on the date of death. Bank and brokerage statements from that date work for financial accounts. Keep this documentation with your tax records; you will need it whenever you sell.
If the estate files a federal estate tax return, you may receive a Schedule A reporting the basis of the property you inherited. Use that figure. Reporting a different number on your own return can trigger a 20% accuracy-related penalty.
Time the Sale to a Low-Income Year
Inherited property automatically qualifies for long-term capital gains rates when you sell, because the decedent’s holding period carries over to you. Long-term rates are tiered by taxable income. For 2026, the 0% bracket runs up to roughly $49,450 for single filers and $98,900 for married couples filing jointly. The 15% rate picks up from there to about $545,500 (single) or $613,700 (joint). Above those amounts the rate is 20%.
If you are between jobs, retired, or otherwise expecting a low-income year, selling inherited property in that window may drop part or all of the gain into the 0% bracket. Combined with the step-up, which has usually eliminated most of the embedded gain already, this timing can bring your federal tax to zero on a sale that would otherwise be fully taxable.
High earners should also watch the Net Investment Income Tax, an additional 3.8% that applies to capital gains when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers. Those thresholds don’t adjust for inflation, so the combined federal rate on a large gain can reach 23.8%. Spreading sales across multiple tax years, when the asset allows it, can keep you under the threshold.
Move Into an Inherited Home
If you inherit a house and make it your main home, you can eventually layer the primary residence exclusion on top of the stepped-up basis. The exclusion shelters up to $250,000 of gain for single filers, or $500,000 for married couples filing jointly, when you sell.
Two tests apply. You must have owned the home for at least two of the five years before the sale, and lived in it as your main home for at least two of those five years. The two years don’t need to be consecutive, and the ownership clock starts when you inherit. The use requirement is the one that forces real planning: you actually have to live there.
If a job change, health issue, or other unforeseen circumstance forces you to sell before hitting the full two years of use, a partial exclusion is available. It scales with how long you lived there. Twelve months of use gets you half the exclusion, which is $125,000 single or $250,000 joint.
Handle Inherited Retirement Accounts Carefully
Retirement accounts are the big exception to the general rule that inheritances aren’t taxed as income. Traditional IRAs and 401(k)s do not get a step-up in basis. Every dollar you withdraw is ordinary income, taxed at your regular rate. For most heirs, these are the most tax-intensive assets they will ever receive, and how you take distributions matters more than almost any other decision.
Spouses Have the Most Options
A surviving spouse can roll an inherited account into their own IRA, delay distributions until their own required beginning date, and withdraw on their own life expectancy. This keeps the money growing tax-deferred for as long as possible and typically produces the lowest lifetime tax bill.
The 10-Year Rule for Most Other Heirs
Under the SECURE Act, most non-spouse beneficiaries who inherit an account from someone who died in 2020 or later must empty it by the end of the tenth year after the account holder’s death. You can take withdrawals in any pattern during those ten years, and that flexibility is the whole planning opportunity. Taking the entire balance in one year can push you into the top bracket; spreading roughly equal withdrawals across all ten years usually produces a much lower total tax.
A narrow group can still stretch distributions over their own life expectancy instead of using the 10-year window: surviving spouses, minor children of the account holder (the 10-year clock starts when they reach the age of majority), disabled or chronically ill individuals, and beneficiaries no more than 10 years younger than the deceased.
Inherited Roth IRAs
Inherited Roth IRAs follow the same timeline but with far better tax treatment. If the original owner had the Roth open for at least five years, withdrawals of contributions and earnings come out tax-free. Non-spouse beneficiaries still must empty the account within ten years, but no income tax is due on the distributions.
Consider a 1031 Exchange for Inherited Rentals
If you inherit investment real estate and want to swap it for a different property without a taxable sale, a 1031 like-kind exchange defers the capital gains tax when you reinvest the proceeds in another investment property of equal or greater value, within strict deadlines.
Right after inheritance, the step-up often makes an exchange unnecessary; there is little gain to defer. The strategy becomes useful if you hold the property for several years, it appreciates significantly, and you then want to move your capital into a different rental or commercial property without stopping to pay tax on the accumulated gain.
Disclaim the Inheritance
Sometimes the best tax move is to refuse the inheritance. A qualified disclaimer redirects the property to the next beneficiary in line, typically a spouse or child in a lower bracket, without triggering gift tax. For tax purposes, the property is treated as if it was never yours.
The rules are unforgiving. The disclaimer must be in writing, irrevocable, and delivered to the executor or title holder within nine months of the date of death (or within nine months of the disclaiming person turning 21). You cannot have accepted any benefit from the property beforehand, and you cannot direct where it goes next. It must pass under the existing estate plan or state intestacy law.
Disclaiming can make sense when accepting would push you into a higher bracket, create future estate tax problems in your own estate, or when the next heir in line simply has more use for the asset or more years to let it grow.
Medicaid Recipients Cannot Disclaim
If you receive Medicaid long-term care benefits, you cannot refuse an inheritance. Federal law requires Medicaid recipients to accept inheritances and report them to their state Medicaid agency, typically within 10 days. Disclaiming or giving away inherited assets during the 60-month look-back period can trigger a penalty period of ineligibility. Talk to an elder law attorney before making any decision.
Check for State Estate and Inheritance Taxes
Even if you clear the federal estate tax threshold with room to spare, state taxes can still take a bite, and their exemptions are much lower.
Twelve states and the District of Columbia impose their own estate tax, paid by the estate before assets reach you. Exemptions range from $1 million in Oregon to over $13 million in Connecticut, with Massachusetts starting at $2 million and Minnesota at $3 million. Rates can reach 12% to 20%. If the decedent lived in one of these states, or owned real estate there, the estate may owe state tax even on a modest estate.
Five states tax the heir directly: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa eliminated its inheritance tax effective January 1, 2025. What you owe depends on your relationship to the deceased. Spouses are exempt everywhere, and children and grandchildren are usually fully or partially exempt. Distant relatives and unrelated beneficiaries can face rates of 15% to 16% in Kentucky and New Jersey. Maryland is the only state with both an estate tax and an inheritance tax.
Where you cannot avoid these taxes, you can at least plan around them: knowing in advance that a state inheritance tax is coming lets you set aside cash for it rather than being forced to sell the inherited asset to pay the bill.