Is inheritance taxable?

If property, such as a bank account or a house, passes to you, you may be wondering, “Is inheritance taxable?” and “Do you have to pay taxes on inheritance?” This subject can be confusing, but H&R Block is here to help you better understand the tax treatment of inherited property.

First, let’s review the different ways a person may inherit assets or property.

Different ways a person can inherit property

A person may receive assets from a deceased individual (often called a bequest or inheritance) through probate, a trust, or by direct transfer.

• Probate: Assets held by a deceased individual are distributed through a legal process typically known as probate, following the terms of a decedent’s will (if one exists) or by intestate succession laws if there is no will (in which case recipients are typically referred to as heirs).
• Trust: Assets held in a trust are distributed according to the terms set by the decedent (i.e., the grantor who has died) during life or upon death.
• Direct transfer: Some property may pass directly, either by operation of law (such as jointly held assets with rights of survivorship) or to named beneficiaries of accounts like IRAs, life insurance policies, or payable-on-death (POD) accounts.

Read on for more information on the tax implications of inheritance.

What is inheritance tax? What about estate tax?

First thing’s first: it’s incredibly rare that estate tax will affect you at the federal level. As for inheritance tax, there is no inheritance tax at the federal level, and only five states impose an inheritance tax. In fact, it’s much more likely for income tax to affect your inheritance. Furthermore, estate tax is imposed on the decedent’s estate and not the beneficiaries or heirs whether at the state level or federal level. Let’s break down the differences between these taxes.

Inheritance tax is a tax on assets received by an heir or a beneficiary from someone who has died. Inheritance tax only exists at the state level. An inheritance tax is paid by the beneficiary or the estate. There is no direct federal tax on inheritance.

Estate tax, on the other hand, is a tax levied on the transfer of the taxable estate of a deceased person (i.e., everything the deceased owned or had an interest in at the time of their death and the value of certain lifetime taxable gifts made after 1976). However, estate tax only applies in limited cases. The estate will only pay the federal estate tax if the estate is worth more than $13,610,000 and the deceased passed away in 2024 (or $13,990,000 if they passed in 2025). The estate tax rate ranges from 18% to 40%. Some states also have estate taxes with differing dollar amount thresholds and rates.

In most cases, you’ll deal with plain old income tax, which can affect the estate of a deceased person in two ways:

• Income tax imposed on an estate for income generated by the estate after someone passes away. This is reported using Form 1041.
• A final income tax return (Form 1040) filed for the deceased by their surviving spouse, executor, or court-appointed personal representative. This tax return covers the income the deceased received up until their death.

Beneficiaries or heirs may also have to report income on their tax returns from inherited property or assets. See “When does inheritance become taxable income?” below.

Which states require you to pay inheritance tax and estate tax?

Inheritance tax only exists at the state tax level, so it’s important to be mindful of state tax laws. You can also talk to your tax professional about any state inheritance tax questions or concerns. As of 2025, five states have inheritance tax (tax on what you receive as a beneficiary or an heir of an estate or some assets transferred before the death):

• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

12 states and the District of Columbia have an estate tax (some states may require the estate to fill out a state estate tax return even if no tax is owed):

• Connecticut
• Hawaii
• Illinois
• Maine
• Maryland
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington
• Washington, D.C.

When does inheritance become taxable income?

Since receiving an unexpected amount of money is generally thought of as a financial windfall, many people also worry about what it means for their taxes. “Does inheritance count as income?” and “Do you pay taxes on inheritance?” are common questions for beneficiaries and heirs.

We’ll answer these questions and more below. Keep in mind that these rules apply to all property, including:

• Bonuses
• Crops and livestock
• Installment obligations
• Interest and dividends income
• Investments
• Partnership income
• Qualified retirement income
• Rental real estate income
• Business income
• Royalties
• Ordinary income portion of mutual funds

Inheritance vs. income

The IRS generally does not consider inherited property or assets to be taxable income. That means if you inherit cash, real estate, or investments, you typically don’t owe federal income tax just for receiving them.

However, any income those assets generate after you inherit them is taxable. For example:

• If you inherit a rental property, the rent you collect is taxable.
• If you inherit stocks and later earn dividends, those dividends are taxable.
• If you inherit a bank account, the interest is taxable.

Here are the most common situations where inherited assets trigger a tax obligation:

1. Income-producing assets

If you, as a named beneficiary or heir, inherit property that generates income—like rental property, dividends, or interest—you must report that income on your tax return in the year you receive it.

2. Income in respect of a decedent (IRD)

This is income the deceased was entitled to but didn’t receive before passing. Examples include:

• Accrued interest or dividends
• Retirement account distributions
• Gross profit from installment sales

IRD is taxable to the named beneficiary or heir who receives it and is reported the same way it would have been by the deceased.

3. Income distributed from an estate or trust

If an estate or trust earns income, distributes it to you, and reports the distribution on a Schedule K-1 (Form 1041), that income is taxable to you—not the estate or trust. You’ll receive a copy of the Schedule K-1 (Form 1041) showing what to report on your return.

Inheriting through an estate vs. a trust: What’s the difference?

Inheriting assets through an estate

As we mentioned at the beginning of the article, when someone passes away, their property may go through probate—a legal process that validates their will or determines heirs if there’s no will. Once probate is complete, the heirs receive the property.

If the estate receives income (like rent or dividends), distributes it to you, and reports it on a Schedule K-1, that income is taxable to you. You’ll report it on your return using the Schedule K-1 provided by the estate.

Inheriting assets through a trust

A trust is a legal entity created by a grantor either during their lifetime—typically as a revocable or irrevocable trust—or upon their death through a testamentary trust established by a will.

• Revocable or irrevocable trust: An irrevocable trust is one that cannot be revoked or amended and is often treated as a separate legal entity from the grantor. As a result, property transferred to an irrevocable trust during the grantor’s lifetime may potentially be excluded from the grantor’s estate. This distinction is important when determining the cost basis of the assets and the holding period for capital gains tax. A revocable trust remains under the grantor’s control during their lifetime and is treated as their property for tax purposes. Even though a revocable trust typically becomes irrevocable upon the grantor’s death, the assets held in the trust at the time of death are generally included in the decedent’s estate and may receive a step-up in basis. See “Step-up in basis” below.
• Testamentary trust: A testamentary trust is one created through a will. It is funded with assets that were not placed in a trust during the grantor’s lifetime. These assets are transferred into a trust during the probate process, according to the instructions in the will. A testamentary trust is irrevocable from the moment it is created, since it comes into effect only after the grantor’s death and is governed by the terms outlined in the will.

In all cases, a designated trustee manages the trust’s assets on behalf of the named beneficiaries. Trusts are often used to control how and when assets are distributed.

• If you receive principal (the original assets placed in the trust), generally it’s not taxable.
• If you receive income generated by the original assets (like interest, dividends, or rent) and it is reported on Schedule K-1, it is taxable to you and must be reported on your return using the Schedule K-1 from the trust.

Step-up in basis

Most inherited property receives a step-up in basis, meaning its worth is set to the fair market value on the date of the decedent’s death. This matters if you later sell the property—your capital gains tax will be based on the difference between the sale price and the stepped-up value, not the original purchase price.

However, when assets are transferred from a trust to a beneficiary, the rules may differ, depending on the type of trust:

• For a revocable trust, assets are included in the grantor’s taxable estate. As a result, a beneficiary will receive a step-up in basis upon the grantor’s death.
• For an irrevocable trust, the treatment depends on whether the assets are included in the grantor’s taxable estate:
  • If the assets are included in the estate, a beneficiary may still receive a step-up in basis.
  • However, if the assets are not included in the decedent’s taxable estate, a beneficiary will not receive a step-up in basis. Instead, you will receive a carry-over basis equal to the trust’s basis in the assets.

Holding period

The IRS generally treats inherited assets as having a long-term holding period, regardless of how long the decedent or beneficiary actually held them. This means that when beneficiaries sell inherited stocks, they typically qualify for long-term capital gains tax rates, even if sold shortly after inheritance.

However, if assets are distributed from an irrevocable trust and do not receive a step-up in basis (because they were not included in the grantor’s estate), the beneficiary’s holding period is generally tacked on to the trust’s holding period. This means the beneficiary inherits the trust’s original holding period, which may be short-term or long-term depending on how long the trust held the asset.

Here’s an example:

Your grandpa passed away and his will directs the creation of a trust. His will instructs the executor to transfer a stock portfolio with a fair market value of $1 million into the trust and to distribute dividend income equally to his children (your parents and aunts/uncles) for 15 years. After the 15-year period, the trust will terminate, and the stock portfolio will be distributed equally among his grandchildren.

During the 15-year period, his children would have received a Schedule K-1 (Form 1041) each year indicating how much income they would have to include in their personal income tax returns.

In 2025, the trust dissolved, and the principal (the stock) was distributed to his five grandchildren. As a grandchild and beneficiary, you received a distribution of $680,000 in stock, which includes a stepped-up basis of $200,000 (the fair market value at your grandpa’s death divided amongst the five grandchildren).

• The holding period is considered long-term, regardless of how long you or the trust held the stock. This is standard for inherited property, including distributions from a testamentary trust. This means that if you sold all the stock within three months of getting it, you would have $480,000 ($680,000 less $200,000) of long-term capital gains.
• You would pay tax on your $480,000 of gain at the 0%, 15%, or 20% capital gain rates (depending on your AGI).
• You could be liable for the Net Investment Income Tax equal to 3.8% of the capital gains over the lesser of the net investment income or the excess of the income over a certain threshold.
• You could also use capital losses to offset any capital gains you incurred during the year, reducing your taxable income. The fiduciary should provide you with information in the year of your distribution, indicating your basis and holding period.

How to report the taxable portion of the sale of inherited property

Upon selling an inherited asset, if the inherited property produces a gain, you must report it as income on your federal income tax return. Depending on the situation, the amount realized could be subject to long-term capital gains tax or you may claim a capital loss.

An inherited property’s stepped-up basis for tax purposes is one of the following:

• The property’s fair market value on the date of the decedent’s death, or
• Less commonly, the property’s fair market value on the alternate valuation date if the estate executor chooses to use alternate valuation.

Essentially, you pay federal income taxes on the gain, which is the difference between the basis (the property’s fair market value on the date the individual died) and the higher sales price you get when you sell the property. In most cases, you’ll use your inherited basis and sale information to complete IRS Form 8949, so you can report your gains and losses on Schedule D.

Let’s look at a couple of examples:

Scenario 1: Calculating capital gains on the sale of your main home that you inherited

You inherit a home from your aunt. It was originally purchased for $125,000 in 1970. After she passed in 2000, the home was valued at $575,000 and you lived in the home for 23 years. You then sold the home for $1 million. You would incur a $425,000 gain ($1 million less $575,000). Since you lived in the home and owned it, you likely qualify for the sale of home exclusion of $250,000 (or $500,000 if you are married filing a joint return). If you have any gain left over after applying the sale of home exclusion, you will be taxed at the long-term capital gains tax rates.

Scenario 2: Calculating capital gains on the sale of an inherited home you didn’t live in

Assume, instead, your aunt lived until 2023. Your aunt passed when the house was worth $1 million, and you inherited it at that point. You decided to sell the house for $1,005,000 10 months after you received it. You would have a $5,000 gain ($1,005,000 less $1,000,000).

Typically, for short-term gains not related to inheritance, you would pay normal income tax rates. However, since you inherited property, you are treated as having a long-term holding period even though you only owned the home for 10 months. Since you did not live in the house, you will not be able to take the sale of home exclusion. In this case, you would pay taxes on the $5,000 long-term gain at the capital gains rates (depending on your adjusted gross income). While you aren’t eligible for the sale of home exclusion tax break, there’s a silver lining: The gain is taxed at long-term rates. You could also use capital losses to offset the capital gains you incurred during the year.

Get help determining if your inheritance is taxable

Tax preparation can be confusing when it comes to inheritance—do you need to pay state estate tax? And is your inheritance taxable as income? If you have recently inherited property and are looking for a way to maximize your tax savings or need help filing your return, learn about ways to file with H&R Block. Whether you file online or with a tax pro, you can rest assured that we’ll get you the biggest tax refund possible, taking your unique situation into consideration.