Do you pay taxes on inherited money?

Inherited cash from a bank account or life insurance death benefit is generally not taxable to the beneficiary at the federal level — it's not treated as income. Inherited retirement accounts (traditional IRA, 401(k)) are a significant exception: distributions from inherited pre-tax retirement accounts are taxable as ordinary income in the year you take them. The tax treatment depends on what type of asset you inherited, not the inheritance itself.

Do you pay capital gains on an inherited house?

Usually very little or none — because of the step-up in basis. When you inherit a home, your cost basis resets to the fair market value on the date of the decedent's death, not what they paid for it decades ago. If you sell the home shortly after inheriting for close to that value, your taxable gain is minimal. If you hold it and it appreciates further, you'd owe capital gains only on the appreciation above the stepped-up value.

What is an inherited IRA and how is it taxed?

An inherited IRA is a retirement account you receive from someone who has died. Unlike the original owner's rules, inherited IRAs for most non-spouse beneficiaries must be fully distributed within 10 years under the SECURE 2.0 Act rules. Distributions from a traditional inherited IRA are taxable as ordinary income. A strategic approach — coordinating distributions across years to manage your effective tax rate — is where CPA planning creates the most value.

Are there any states with an inheritance tax?

Yes — as of 2026, six states impose inheritance taxes: Iowa (phasing out), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland also has a separate estate tax. Inheritance taxes are paid by the beneficiary, not the estate, and rates and exemptions vary by state and the beneficiary's relationship to the decedent. Spouses are typically exempt; more distant relatives face higher rates. If you live in or inherit from someone who lived in one of these states, state inheritance tax is a real planning consideration.

Do I need a CPA to handle inherited assets?

Not always — simple inheritances (cash from a bank account, a home you sell quickly near its date-of-death value) may require only a basic return adjustment. But inherited IRAs, partial interests in real property, inherited business interests, or large portfolios with complex basis tracking almost always benefit from CPA guidance. The tax decisions made in the first year after inheriting assets are often difficult or impossible to reverse.

Inherited Money and Property: What You Actually Owe in Taxes in 2026

July 10, 2026 · Guide · 8 min read

The most common misconception about inheritances is that the money is simply yours, tax-free. The reality depends entirely on what you inherited: cash is treated differently than a home, which is treated differently than a traditional IRA, which is treated differently than a Roth account. Understanding those distinctions before you take any action — particularly with retirement accounts — determines whether you preserve or unnecessarily surrender a substantial portion of what you received.

The Federal Estate Tax: Usually Not Your Problem

The federal estate tax is paid by the estate, not by you as the beneficiary. In 2026, the federal estate tax exemption is $13.99 million per individual (indexed annually for inflation) — meaning the estate must exceed that threshold before any federal estate tax is owed. Fewer than 0.1% of estates pay federal estate tax.

If you inherit from a taxable estate (one that exceeds the exemption threshold), any estate tax owed was handled by the estate before distribution to beneficiaries. You receive your inheritance net of estate taxes already paid — you don't owe additional tax on what you received.

State estate taxes are a separate matter: a dozen states have their own estate taxes with much lower exemption thresholds — Massachusetts and Oregon, for example, have exemptions as low as $1 million. If the decedent resided in a state with a separate estate tax, the estate may have owed state estate tax even if it was below the federal threshold.

Inherited Real Estate: The Step-Up in Basis

When you inherit a home or other real property, your cost basis — the number used to calculate capital gains when you sell — resets to the property's fair market value on the date of the original owner's death. This is called a "step-up in basis," and it's one of the most valuable provisions in the tax code for inherited assets.

Example: Your parent bought a home in 1985 for $80,000. It's worth $620,000 when they pass away. If they had sold it, they would have faced capital gains on $540,000 of appreciation. When you inherit it, your basis steps up to $620,000. If you sell it six months later for $630,000, you owe capital gains tax only on $10,000 — the appreciation since you inherited it.

This is why the common advice to "sell an inherited home quickly" has real tax logic behind it. The longer you hold inherited real estate and the more it appreciates, the more capital gains you'll owe when you eventually sell. If you hold the home for rental or personal use and it appreciates significantly, you lose the benefit of the step-up on that additional appreciation.

One critical nuance: only assets included in the decedent's taxable estate receive the step-up. Assets in irrevocable trusts established before death, or gifts made during lifetime, don't receive the step-up. If the property was transferred to you as a gift rather than an inheritance, your basis is typically the donor's original cost, not the fair market value at transfer. The distinction matters significantly for capital gains planning. Your CPA can help you confirm how capital gains apply to your specific situation.

Inherited Brokerage Accounts and Stocks

Non-retirement investment accounts (standard brokerage accounts, taxable accounts holding stocks, bonds, mutual funds) also receive the step-up in basis at death. The cost basis of every security in the account resets to its fair market value on the date of death.

This makes inherited brokerage accounts with low-basis, high-appreciation positions particularly valuable. A position bought for $5,000 that's worth $150,000 at death passes to the beneficiary with a $150,000 basis. If you sell it immediately, you owe nothing on that $145,000 of appreciation that occurred during the decedent's lifetime.

For accounts held jointly or transferred via a revocable living trust (where the decedent retained control), the step-up rules apply to the decedent's portion. For community property states (California, Texas, Arizona, Nevada, Washington, Idaho, Louisiana, Wisconsin, Alaska with election), both spouses' shares of community property assets receive a step-up at the first spouse's death — a more favorable treatment than in common law states.

Inherited Cash: No Income Tax

Cash inherited from a bank account, savings account, or CD — or life insurance death benefits paid to named beneficiaries — is not taxable income to the beneficiary at the federal level. You don't report it as income and don't pay tax on it. The only exception is if the account generated interest or dividends between the date of death and the date of distribution to you, which would be taxable as investment income.

Life insurance death benefits paid directly to named beneficiaries pass outside the estate entirely — they're not subject to federal income tax and generally aren't part of the probate estate. This is one reason life insurance is commonly used as an estate planning tool for liquidity and equalization among beneficiaries.

Inherited Retirement Accounts: Where Most Tax Complexity Lives

Inherited retirement accounts are the most tax-complex inherited asset class and the one where planning errors are most costly and hardest to reverse. The rules differ based on who you inherit from, what type of account it is, and your relationship to the decedent.

Inherited Traditional IRA (non-spouse beneficiary): Under the SECURE 2.0 Act rules in effect through 2026 and beyond, most non-spouse beneficiaries must withdraw the entire balance within 10 years of the year of death. Distributions are taxable as ordinary income in the year taken. The 10-year rule does not require annual minimum distributions — you can take the full balance in year 10, or spread it across years. Strategically, most beneficiaries should withdraw more in low-income years and less in high-income years to minimize the effective tax rate on each distribution. This is exactly where working with a CPA on proactive tax planning creates measurable value.

Inherited Roth IRA (non-spouse beneficiary): The same 10-year rule applies, but distributions from an inherited Roth IRA are tax-free (as long as the Roth account was at least 5 years old when the original owner died). This makes inherited Roth accounts extremely valuable — you receive 10 years of tax-free growth and tax-free distributions.

Spouse inheriting a retirement account: Spouses have significantly more options. A surviving spouse can roll an inherited IRA into their own IRA (treating it as their own), which allows them to delay required minimum distributions until their own RMD age and follow their own distribution rules.

Exceptions to the 10-year rule: Eligible designated beneficiaries — a surviving spouse, a disabled or chronically ill beneficiary, a minor child of the original account owner (until they reach majority), or a beneficiary not more than 10 years younger than the decedent — may use the old "stretch IRA" rules allowing lifetime distributions based on their life expectancy. If you qualify as an eligible designated beneficiary, this option is significantly more favorable and should be confirmed with a CPA before electing a distribution strategy.

Inherited Business Interests

Inheriting a partial or full interest in a business — a partnership interest, LLC membership, S-corp shares — triggers a basis step-up similar to other inherited assets, but the tax complexity multiplies significantly. Business entities have inside basis (the entity's basis in its assets) and outside basis (what you, as an owner, have in your ownership interest). A step-up in outside basis from inheritance doesn't automatically step up inside basis — this requires a Section 754 election at the entity level to align the two, which has significant ongoing tax implications.

If you inherit a business interest, contact a CPA before filing any return or making any distributions. The decisions made in the first return filed after inheritance — including whether to make a Section 754 election — may be permanent. See our guidance on estate and trust tax planning for context on how business interests interact with estate planning structures.

State Inheritance Taxes: A Separate Consideration

Six states impose inheritance taxes paid by beneficiaries rather than by the estate: Iowa (phasing out by 2025 for most beneficiaries), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. In states with inheritance taxes, the rate and exemption typically depend on your relationship to the decedent — surviving spouses are universally exempt, children are often exempt or taxed at low rates, while more distant relatives and unrelated beneficiaries face higher rates.

Maryland also has a separate state estate tax in addition to the federal one, with a much lower exemption threshold than the federal limit. If you're inheriting from someone who resided in one of these states, or if you reside there and are inheriting out-of-state real property, the state tax implications should be modeled before you make any decisions about how to hold or liquidate the assets.

The First-Year Decisions That Matter Most

Most of the tax-critical decisions for inherited assets must be made within the first year — sometimes within months. For inherited retirement accounts, the distribution strategy for year one sets a pattern that's difficult to undo. For inherited real estate, the decision to sell versus rent starts depreciation recapture considerations. For inherited business interests, entity elections may be time-sensitive.

The value of a CPA in inheritance situations is highest in the months immediately after the inheritance, not at tax filing time. A proactive consultation with a CPA who handles estate and inheritance situations lets you make these decisions with full information before irreversible consequences set in. Find CPAs experienced in estate and inheritance planning by city or locate a CPA near you to discuss your specific situation before taking distributions or selling inherited assets.

Frequently Asked Questions

Do you pay taxes on inherited money?: Inherited cash from a bank account or life insurance death benefit is generally not taxable to the beneficiary at the federal level — it's not treated as income. Inherited retirement accounts (traditional IRA, 401(k)) are a significant exception: distributions from inherited pre-tax retirement accounts are taxable as ordinary income in the year you take them. The tax treatment depends on what type of asset you inherited, not the inheritance itself.
Do you pay capital gains on an inherited house?: Usually very little or none — because of the step-up in basis. When you inherit a home, your cost basis resets to the fair market value on the date of the decedent's death, not what they paid for it decades ago. If you sell the home shortly after inheriting for close to that value, your taxable gain is minimal. If you hold it and it appreciates further, you'd owe capital gains only on the appreciation above the stepped-up value.
What is an inherited IRA and how is it taxed?: An inherited IRA is a retirement account you receive from someone who has died. Unlike the original owner's rules, inherited IRAs for most non-spouse beneficiaries must be fully distributed within 10 years under the SECURE 2.0 Act rules. Distributions from a traditional inherited IRA are taxable as ordinary income. A strategic approach — coordinating distributions across years to manage your effective tax rate — is where CPA planning creates the most value.
Are there any states with an inheritance tax?: Yes — as of 2026, six states impose inheritance taxes: Iowa (phasing out), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland also has a separate estate tax. Inheritance taxes are paid by the beneficiary, not the estate, and rates and exemptions vary by state and the beneficiary's relationship to the decedent. Spouses are typically exempt; more distant relatives face higher rates. If you live in or inherit from someone who lived in one of these states, state inheritance tax is a real planning consideration.
Do I need a CPA to handle inherited assets?: Not always — simple inheritances (cash from a bank account, a home you sell quickly near its date-of-death value) may require only a basic return adjustment. But inherited IRAs, partial interests in real property, inherited business interests, or large portfolios with complex basis tracking almost always benefit from CPA guidance. The tax decisions made in the first year after inheriting assets are often difficult or impossible to reverse.