Is Your Inheritance Taxable?

The short answer: usually no

In most cases, an inheritance is not considered taxable income for federal income tax purposes. When you inherit cash, property, investments, or other assets through a will or intestate succession, you generally do not owe income tax on the value you receive. However, there are several important exceptions and nuances that every heir should understand.

Federal estate tax vs. inheritance tax

These are two different things, and the distinction matters. The federal estate tax is paid by the estate before assets are distributed to heirs. As of 2025, the federal estate tax exemption is $13.99 million per individual ($27.98 million for married couples). Only estates exceeding this threshold owe federal estate tax. The vast majority of estates — well over 99% — owe nothing.

An inheritance tax is paid by the person receiving the inheritance and is imposed by some states (not the federal government). As of 2025, six states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The rates and exemptions vary by state and by the relationship between the deceased and the heir — spouses are typically exempt, and direct descendants often pay reduced rates.

When inherited assets are taxable

Retirement accounts. Inherited IRAs, 401(k)s, and similar accounts are taxable as ordinary income when you withdraw the money. Under the SECURE Act (2019), most non-spouse beneficiaries must withdraw all funds within 10 years of the original owner's death.

Income earned after inheritance. If inherited investments generate dividends, interest, or capital gains after you receive them, that income is taxable. Similarly, rental income from inherited property is taxable.

Income in respect of a decedent (IRD). This includes income the deceased earned but hadn't yet received — unpaid salary, accrued bonuses, or unpaid invoices for a business. This income is taxable to whoever receives it.

The stepped-up basis benefit

One of the most significant tax benefits of inheritance is the stepped-up basis. When you inherit property or investments, your tax cost basis resets to the fair market value on the date of death — not what the deceased originally paid. If you inherit a house that was purchased for $100,000 but is worth $400,000 at the date of death, your basis is $400,000. If you sell it for $410,000, you only pay capital gains tax on the $10,000 gain, not the $310,000 gain from the original purchase price.