Receiving an inheritance can be exciting, but there are tax implications when you inherit money or property. Whether your inheritance is taxed depends on the amount youre inheriting and the state you live in. Here’s what you need to know about inheritance tax and how to pay as little as possible if you recently got an inheritance.
The One Big Beautiful Bill that passed includes permanently extending tax cuts from the Tax Cuts and Jobs Act, including increasing the cap on the amount of state and local or sales tax and property tax (SALT) that you can deduct, makes cuts to energy credits passed under the Inflation Reduction Act, makes changes to taxes on tips and overtime for certain workers, reforms Medicaid, increases the Debt ceiling, and reforms Pell Grants and student loans. Updates to this article are in process. Check our One Big Beautiful Bill article for more information.
The Truth About Inherited Property and Your Tax Bill
Inheriting a house from a loved one can be both a blessing and a source of confusion. While you’re still processing your loss, you suddenly have to navigate complex tax rules and financial decisions If you’ve recently inherited property or expect to in the future, you’re probably wondering “Do I have to pay taxes on a house I inherited?”
The good news is that generally beneficiaries don’t have to pay income tax on the property they inherit. But (and this is a big but) there are still potential tax implications depending on what you decide to do with that property.
This guide will tell you everything you need to know about inherited property taxes, your choices, and how to pay the least amount of tax possible. Let’s dive in!.
The Basics: Inheriting Property and Initial Tax Implications
When someone leaves you a house in their will, your first concern might be whether you’ll get hit with a big tax bill right away. Here’s the straightforward answer:
Just inheriting a house doesn’t mean you have to pay federal income tax right away. You won’t have to report the house as income on your tax return just because you inherited it because the IRS doesn’t see it as income.
However, there are a few situations that might require you to pay taxes:
- Property taxes: As the new owner, you’ll be responsible for ongoing property taxes
- Estate taxes: The estate might owe taxes before assets are distributed
- Inheritance taxes: Some states charge inheritance taxes
- Capital gains taxes: You may owe these if you sell the property for more than its stepped-up basis
Let’s break down each of these situations so you know what you might be up against.
Understanding the Stepped-Up Basis (Your Tax Best Friend)
If you inherit property, one of the best tax rules for it is something called “stepped-up basis.” “This is really a huge benefit when it comes to lowering possible capital gains taxes.”
Here’s how it works:
When you inherit a house, the property’s tax basis “steps up” to its fair market value on the date of the previous owner’s death. This essentially wipes out any capital gains that accumulated while the deceased owned the property.
For example:
- Your grandmother purchased her home in 1965 for $25,000
- By the time you inherit it, the home is worth $425,000
- Without the stepped-up basis, if you sold the home, you’d potentially owe tax on $400,000 of capital gains
- But with the stepped-up basis, your new basis is $425,000, and you only pay capital gains tax on any increase in value between when you inherited it and when you sell it
This step-up in basis is one of the biggest tax advantages for inherited property. It’s like the tax clock gets reset when the property passes to you!
What About Estate Taxes?
You might have heard horror stories about estate taxes, but the truth is that most estates don’t owe federal estate tax at all.
For 2025, the federal estate tax exemption is quite high – an individual can leave behind $13.61 million without triggering federal estate taxes. For married couples, that amount is effectively doubled.
So unless the person who left you the property had an extremely valuable estate (worth more than $13.61 million), federal estate taxes probably won’t be an issue. But it’s always smart to consult with a tax professional if you’re inheriting part of a high-value estate.
State Inheritance and Estate Taxes: The Hidden Gotcha
While federal taxes might not be an immediate concern, don’t forget about state taxes! Some states have their own inheritance or estate taxes with much lower thresholds than federal taxes.
As of 2025, these states have inheritance taxes:
- Iowa
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
And these states have their own estate taxes:
- Connecticut
- Hawaii
- Illinois
- Maine
- Massachusetts
- Minnesota
- New York
- Oregon
- Rhode Island
- Vermont
- Washington
- District of Columbia
If you inherit property in one of these states, you might have tax obligations regardless of the federal rules. The rates and exemptions vary widely by state, so check with your state’s tax department or a local tax professional.
Capital Gains Tax: The Big One to Watch For
Here’s where most people end up paying taxes on an inherited house – when they sell it.
If you sell an inherited property for more than its stepped-up basis, you’ll likely owe capital gains tax on the difference. How much you’ll pay depends on:
- How long you held the property
- Your income tax bracket
- How much the property appreciated since you inherited it
Long-Term vs. Short-Term Capital Gains
If you sell the inherited property within a year of inheriting it, any profits are considered short-term capital gains, which are taxed at your ordinary income tax rate (potentially up to 37% in 2025).
If you hold the property for more than a year before selling, profits are taxed at the more favorable long-term capital gains rates:
| Income (Single) | Income (Married Filing Jointly) | Long-Term Capital Gains Rate |
|---|---|---|
| $0 – $48,350 | $0 – $96,700 | 0% |
| $48,350 – $533,400 | $96,700 – $600,050 | 15% |
| Over $533,400 | Over $600,050 | 20% |
Note: These are the 2025 tax brackets. Check for updates if you’re reading this in a different year.
Three Smart Strategies to Avoid Paying Capital Gains Tax
If you’re concerned about a potential tax bill from selling an inherited house, I’ve got good news – there are legitimate ways to minimize or even eliminate your capital gains tax burden!
Strategy #1: Sell the Property Immediately
One straightforward approach is to sell the property right away after inheriting it. If you sell it for approximately the same value as the stepped-up basis (the fair market value at the time of inheritance), there will be little to no capital gains to tax.
For example, if you inherit a house valued at $300,000 and sell it one month later for $305,000, your capital gains would only be $5,000.
The downside? You might miss out on potential future appreciation, and immediate sales don’t always fetch the best price. Plus, if the real estate market is rising rapidly, even a short delay could result in noticeable gains.
Strategy #2: Make It Your Primary Residence
This is my favorite strategy if you’re actually looking for a place to live. If you move into the inherited house and make it your primary residence for at least 2 years out of the 5 years preceding the sale, you can take advantage of the capital gains exclusion for primary residences.
This exclusion allows you to avoid paying capital gains tax on:
- Up to $250,000 in profit if you’re single
- Up to $500,000 in profit if you’re married filing jointly
For example, if you inherit a house with a stepped-up basis of $300,000, move in, and sell it 2 years later for $450,000, the entire $150,000 profit could be tax-free!
Strategy #3: Convert It to a Rental Property
If you don’t want to live in the inherited house but also don’t want to sell it immediately, consider turning it into a rental property. This opens up additional tax strategies:
- You can claim depreciation deductions on the property
- You can deduct expenses related to maintaining and managing the rental
- If you later want to sell, you might qualify for a 1031 exchange, which allows you to defer capital gains tax by reinvesting the proceeds into another investment property
The rental income will be taxable, but with proper management and tax planning, the overall financial benefits might outweigh the costs.
What If There’s Still a Mortgage?
Inherited properties don’t always come free and clear. If there’s still a mortgage on the house you’ve inherited, you generally have three options:
-
Assume the mortgage payments: In most cases involving family inheritance, you can simply continue making the mortgage payments.
-
Refinance the mortgage: Put the loan in your name with potentially better terms.
-
Sell the property to pay off the loan: If you can’t afford the payments or don’t want the property, selling might be your best option.
Be aware that if the property had a reverse mortgage, you might have only a limited time (usually six months) to repay the loan, typically by selling the property or refinancing.
When Multiple Heirs Inherit a Property
Things get more complicated when you inherit property along with siblings or other beneficiaries. Now you’ve got to make decisions together, which isn’t always easy. Here are your main options:
- Buyout: One heir buys out the others’ shares.
- Promissory note: One heir keeps the property and agrees to pay the others over time.
- Sell and split the profits: Often the cleanest solution.
- Rent and share income: Keep the property as a joint investment.
If you can’t reach an agreement, the nuclear option is a “suit for partition,” where a court forces the sale of the property. But honestly, this should be a last resort as legal fees will eat into everyone’s inheritance.
Do You Need Repairs Before Selling?
If you decide to sell an inherited property, you’ll need to decide whether to invest in repairs first. This is a balancing act:
-
Repairs to sell: Major issues like the roof, foundation, furnace, and windows often need to be addressed to get a decent sale price. A home inspection (costing between $250-$700) can help identify critical problems.
-
Repairs to rent: If you’re planning to rent the property, focus on cosmetic improvements like carpet and paint rather than long-term structural issues.
Remember that money spent on repairs might increase your stepped-up basis, potentially reducing capital gains taxes later – but keep good records to prove these improvements!
Can You Just Refuse the Inheritance?
Yes! This might sound crazy – who would turn down free property? But sometimes accepting an inheritance comes with more financial headaches than benefits.
If the property is underwater (worth less than its mortgage), in terrible condition, or would trigger significant tax complications for your specific situation, you can “disclaim” the inheritance.
But be careful – once you disclaim, the decision is irrevocable, and the property will pass to the next beneficiary in line. Don’t make this decision without consulting a tax or estate planning professional.
Final Thoughts: Getting Professional Help
While I’ve tried to cover all the bases here, tax situations can get complicated quickly, especially with valuable assets like real estate. The tax implications of inherited property depend on many factors unique to your situation.
I always recommend consulting with:
- A tax professional familiar with inheritance tax issues
- An estate planning attorney if the estate is complex
- A financial advisor to help integrate the inheritance into your overall financial plan
The few hundred dollars you might spend on professional advice could save you thousands in unnecessary taxes or help you avoid costly mistakes.
To sum it all up: No, you generally don’t have to pay income tax simply for inheriting a house. However, you may face:
- Ongoing property taxes
- Possible state inheritance taxes
- Potential capital gains taxes if you sell the property for more than its stepped-up basis
The good news is that with proper planning, many of these tax burdens can be minimized or even eliminated completely. The stepped-up basis rule is particularly beneficial, effectively wiping out years or even decades of appreciation for tax purposes.
Remember that an inheritance represents someone’s wish to provide for you after they’re gone. Taking the time to understand the tax implications helps you honor that gift by maximizing its value.
Have you inherited property recently? What challenges did you face with the taxes? Share your experience in the comments below!
Minimize retirement account distributions
Inherited retirement assets are not taxable until they’re distributed. However, if the beneficiary is not the spouse, certain rules may apply to when the distributions must occur.
- Most of the time, if one spouse dies, the other can take over the IRA as their own. Minimum distributions would usually start at age 73, the same age that they would for the surviving spouse’s own retirement accounts.
- If someone other than your spouse leaves you a traditional IRA, you can move the money to an inherited IRA in your own name. Next, you can choose how to distribute the money. If the account holder was over 73 years old, you can take it all out at once by the end of the year after they died. If they were younger than 73, you have another option: take it all out within 10 years of the year they died.
Give away some of the money
It may seem counter-intuitive, but sometimes it makes sense to give a portion of your inheritance to others. In addition to helping those in need, you could potentially avoid taxable gains on appreciated property and receive a tax deduction by donating to a charitable organization.
If youre expecting to leave money to people when you die, consider giving annual gifts to your beneficiaries while youre still living. You can give a certain amount to each person — $18,000 for 2024 — without reducing your lifetime estate tax exemption amount and it doesnt typically require you to file a gift tax return.
Giving gifts not only helps your loved ones right away, but it also lowers the size of your estate, which can be helpful if you’re getting close to the taxable amount. Talk with an estate planning professional to ensure youre staying current with the frequent changes to estate tax laws.
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Inheriting Your Parents House | Do I Have to Pay Tax On A House That I Inherited
FAQ
How do I avoid capital gains tax on an inherited house?
1. Make the Inherited Property Your Primary Residence. One way to avoid capital gains tax on your inherited property is to make it your primary residence.
What happens when you inherit a house from your parents?
When you inherit a house from your parents, you will likely need to go through the probate process to gain legal title to the property. You’ll need to consider options such as living in the home, renting it out, or selling it, which will determine your financial obligations, like ongoing mortgage, property tax, and insurance payments, and any potential capital gains tax if you sell the home for a profit.
How do I avoid inheritance tax on my parents’ house?
Transfer assets into a trust Because those assets don’t legally belong to the person who set up the trust, they aren’t subject to estate or inheritance taxes when that person passes away. Setting up a trust also has other financial benefits, such as helping the estate avoid probate.
Is inherited property considered taxable income?
Inheritances are not considered income for federal tax purposes, whether you inherit cash, investments or property. However, any subsequent earnings on the inherited assets are taxable, unless it comes from a tax-free source.
How much tax do you pay if you inherit a house?
If you inherit from someone who lived (or owned property) in one of these states, you’ll need to check that state’s inheritance tax rules: Pennsylvania: Taxes inheritances at rates from 4. 5% (for direct descendants) up to 15% (for non-family heirs). Spouses and minor children are exempt. Nebraska: Rates range 1%–15%.
Do you pay tax on inherited money?
A: Yes. With a traditional retirement account, you’ll pay income tax on withdrawals from the inherited account. You don’t pay tax just for inheriting it, but as you take money out, those distributions are taxed as income (just like they would have been for the original owner). Q: Do I owe any state taxes on an inheritance?.
Are inherited property taxes taxable?
Five states impose a tax on inheritance, and 12 states have estate taxes. Inheritance isn’t usually considered taxable income at the federal level—but exceptions apply: While most inherited property isn’t taxed as income, any income it generates (like interest, dividends, or rental income) is taxable.
Do you pay capital gains tax on inherited property?
You can inherit a property at fair market value and only pay capital gains tax from inheritance to sale. Inheriting property and taxes on inherited property also depend on the existing mortgage and other stakeholders.
Do you owe state tax on inherited property?
A: Yes, but only in a few places. Most states do not tax inheritances. If the deceased lived (or owned property) in one of the 5 states with an inheritance tax (like PA, NJ, NE, KY, MD), then you might owe state tax on what you inherited. Otherwise, no state inheritance tax applies.
Do you have to pay estate tax if you inherited a house?
You don’t have to worry too much about the federal estate tax because it is taken out of the estate before you get the house you inherited. You only qualify for this if your estate is worth more than $13. 61 million (so not an issue for the vast majority of people)—and surviving spouses are exempt from having to pay that anyway.