Inheritance tax

Say you inherited a piece of real property… Do you report that on your federal taxes? In short, yes. We’ll walk you through the basics of what’s known as inheritance tax, and the tax treatment of inherited property when it’s sold.

What is inheritance tax?

First, let’s answer, “what is inheritance tax?” While there is technically no federal inheritance tax, many people will associate the term with the taxes paid after selling inherited property. For example, you will pay personal federal income tax if you are the beneficiary of property (real estate, stocks, qualified retirement income, investments, interest and dividends, royalties, bonuses, crops and livestock, installment obligations, and partnership income) you inherited and then sold. There are also some other circumstances where you will pay personal federal income tax on inherited property that we will discuss below.

Essentially, you pay federal income taxes on the difference in the basis (the property’s value on the date the individual died) and the price you get when you sell the property.

So, while we aren’t giving you an inheritance tax definition (because it doesn’t apply federally), we can show you how taxes would apply to a real-life inheritance situation. Here’s an example. If you inherit 100 shares of stock valued at $50 per share on the day your benefactor (perhaps your family member) passed away and you sell the stock for $55 per share, you pay tax on the difference. So, $5,500-$5,000 = $500. You will pay tax on $500. You will be taxed at long term capital gain rates since inherited property, in this case stock, has a long-term holding period.

Which states require you to report and pay inheritance tax?

Talk to your tax pro about any state inheritance tax consequences.

Is the sale of inherited property taxable?

The answer to “is the sale of inherited property is taxable?” depend on if you sell the property for more than your basis. If yes, you have a taxable gain.

An inherited property’s basis from a decedent is one of the following:

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

How should you report inherited property to the IRS?

Whether an inherited property is taxable depends on if it produces income—think interest, dividends, or rents. This includes income from property given to a trust or held in an estate and paid, credited, or distributed to a beneficiary. It also depends on whether the property included any income with respect to the decedent (IRD) that will be taxed to the beneficiary.

Upon selling, if your inherited property produces a gain, you must report it as income on your federal income tax return as a beneficiary.

Keep in mind, your taxation depends on the type of property you received from your deceased family member. What do we mean by this? A few things:

• If you sell property, you could be subject to capital gains tax.
• Estate tax is paid by an estate, not individual people – and it taxes the value of the decedent’s property. If the estate is the beneficiary, income in respect of a decedent is reported on the estate’s Form 1041, not your individual return. Some people use the term inheritance tax when they are really talking about the estate tax. Estate tax is a tax paid by the estate on estates valued over $11,700,000 or more.

More help with inheritance tax

If you have recently come into inheritance money and are looking for a way to maximize your tax savings, we can help!  Learn about ways to file with H&R Block. From in-person to virtual tax prep offerings, we’ll help you produce an accurate tax return—taking advantage of every tax credit and deduction you qualify for.