An inheritance tax is a levy potentially paid by the recipient of assets inherited from a deceased individual. Just five states have an inheritance tax as of 2025.
Inheriting a house can be bittersweet. While you’re gaining valuable property, you might be worried about the tax implications that come with it.
Look, I get it Tax stuff is confusing, especially when you’re dealing with the emotional process of inheriting a loved one’s home. The good news? You might not owe as much in taxes as you think – or possibly none at all depending on your situation!
In this comprehensive guide we’ll break down exactly what taxes (if any) you need to worry about when someone leaves you a house in their will, and some smart strategies to minimize your tax burden.
The Big Question: Federal Inheritance Tax on Houses
Here’s the first piece of good news – there is no federal inheritance tax in the United States. Yep, you read that right!
When someone leaves you a house in their will, you don’t automatically owe taxes to the federal government just for inheriting it. This is a common misconception that causes a lot of unnecessary worry.
Even so, that doesn’t mean you’re free of taxes all together. If you do certain things with the property, you may have to pay other taxes as well:
- Estate taxes – paid by the estate before you inherit
- Capital gains taxes – potentially owed if you sell the inherited property
- Property taxes – ongoing taxes for owning the property
- State inheritance taxes – only in certain states
Let’s dive deeper into each of these so you understand exactly what you might owe.
Estate Tax vs. Inheritance Tax: What’s the Difference?
People often confuse these two types of taxes, so let’s clear things up:
- Estate tax is paid by the deceased person’s estate before assets are distributed to heirs
- Inheritance tax is paid by the person who inherits the assets
There is a federal estate tax, but there is no federal inheritance tax, as I said before. However, the federal estate tax will only be charged on estates worth more than $11 million in 2025. 7 million per individual. In 2025, that exemption has risen to $12. 06 million.
There won’t be any federal estate taxes for most Americans, so that’s good news. Based on the information given, the federal estate tax only applies to assets worth more than these amounts. The tax rate ranges from 2018 to 2040.
State Inheritance Taxes: The Exception to the Rule
Some states do charge inheritance tax, but not the federal government. Currently, only six states have inheritance taxes:
- Iowa
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
If you live in one of these states or inherit property located in one of them, you might owe state inheritance tax. The rates and exemptions vary by state, so you’ll need to check your specific state’s laws.
According to one of the sources, inheritance tax can be charged at 40% in some cases. However, this likely refers to the UK inheritance tax system, as US state inheritance tax rates are typically lower.
Capital Gains Tax: The Hidden Tax Surprise
Even though there’s no federal inheritance tax, you might owe capital gains tax if you decide to sell the inherited house. This is where many inheritors get caught by surprise.
However, there’s a significant tax advantage when you inherit property: the stepped-up basis.
What is a Stepped-Up Basis?
When someone inherits property, the IRS allows them to use what’s called a “stepped-up basis” for calculating capital gains tax. This means the property’s value is “stepped up” to its fair market value at the time of the previous owner’s death, rather than using the original purchase price.
Here’s an example to make it clear:
Your parents bought their home for $100,000 thirty years ago. When you inherit it, the home is worth $400,000. If you decide to sell it right away for $400,000, you’d owe $0 in capital gains tax because there’s no gain over the stepped-up basis. If you wait a few years and sell it for $450,000, you’d only pay capital gains tax on the $50,000 difference between the stepped-up basis and the sale price.
Without the stepped-up basis, you’d be taxed on the entire $300,000 increase in value from the original purchase price to the sale price – which would result in a much higher tax bill!
2025 Capital Gains Tax Rates
If you do end up selling an inherited house for more than its stepped-up basis, here’s what you might owe in capital gains taxes for 2025:
Long-Term Capital Gains Rates (for assets held more than a year):
| Tax Rate | Single Filers | Married Filing Jointly | Married Filing Separately | Head of Household |
|---|---|---|---|---|
| 0% | $0 – $48,350 | $0 – $96,700 | $0 – $48,350 | $0 – $64,750 |
| 15% | $48,350 – $533,400 | $96,700 – $600,050 | $48,350 – $300,000 | $64,750 – $566,700 |
| 20% | $533,400+ | $600,050+ | $300,000+ | $566,700+ |
For short-term capital gains (assets held less than a year), you’d be taxed at ordinary income rates, which can go up to 37% for the highest earners.
Strategies to Avoid Paying Taxes on an Inherited House
Now for the part you’ve been waiting for – how can you minimize or avoid taxes on that inherited house? Here are four effective strategies:
1. Sell the Property Immediately
If you sell the inherited house right away, you’ll benefit from the stepped-up basis without giving the property time to appreciate further. This could mean paying zero capital gains tax if you sell for the same amount as the stepped-up basis.
According to the IRS FAQ page, “If you sell the property for more than your basis, you have a taxable gain.” So selling quickly at market value can help you avoid this gain.
2. Make it Your Primary Residence
If you’re willing to move into the inherited house, this strategy can save you significant taxes down the road:
- Move into the inherited house and make it your primary residence
- Live there for at least 2 years out of a 5-year period
- When you sell, you can exclude up to $250,000 of capital gains if you’re single, or up to $500,000 if you’re married filing jointly
This exclusion is separate from and in addition to the stepped-up basis advantage!
3. Rent Out the Property
If you don’t want to sell or live in the inherited house, you could rent it out. This won’t avoid taxes entirely, but it creates income and gives you some additional options:
- You can deduct expenses related to the rental property
- If you eventually want to sell, you could use a 1031 exchange to defer capital gains taxes by purchasing another investment property
4. Disclaim the Inheritance
If you’re concerned about tax implications or simply don’t want the property, you have the option to disclaim (refuse) the inheritance. The property would then pass to the next beneficiary in line.
This is a drastic step and can’t be reversed, so consider it carefully. But it is an option if you’re really worried about tax consequences.
What Happens When You Inherit a House with a Mortgage?
Inheriting a house with an outstanding mortgage adds another layer of complexity. You generally have two options:
- Sell the house to pay off the mortgage and keep any remaining money
- Keep the house and take over the mortgage payments
If you decide to keep the house, you’ll need to either continue making payments on the existing loan or pay it off using other assets.
According to one source, “relatives inheriting a mortgaged house must live in it if they intend to keep its mortgage in the deceased relative’s name.” Otherwise, you may need to refinance the mortgage in your own name.
Inheriting a House with Siblings
When multiple siblings inherit a house together, it creates a unique situation. Unless the will explicitly states otherwise, ownership is typically distributed equally among the siblings.
This means you and your siblings will need to decide together whether to:
- Sell the house and divide the proceeds
- Have one sibling buy out the others’ shares
- Continue to co-own the property together
These discussions can sometimes be challenging, so it’s worth considering hiring a mediator or attorney to help navigate the process if necessary.
The 7-Year Rule in Inheritance Tax
One source mentions a “7-year rule” in inheritance tax, stating that “no tax is due on any gifts you give if you live for 7 years after giving them.” This appears to be referring to UK inheritance tax rules, not US tax law.
In the US, gift tax and estate tax are connected, with a lifetime exemption that applies to both. There’s no specific 7-year rule in the US tax system.
Steps to Take After Inheriting a House
If you’ve recently inherited a house, here’s what you should do:
- Locate the will and death certificate – You’ll need these documents for legal processes
- Go through probate – In most cases, you’ll need to go through this legal process to transfer ownership
- Get the property appraised – This establishes the stepped-up basis for tax purposes
- Decide what to do with the property – Sell, move in, or rent it out
- Consult with tax and legal professionals – They can help you navigate the complex tax implications
To sum it all up – there’s no federal inheritance tax on houses left in wills, though some states do have inheritance taxes. The bigger tax concern for most inheritors will be potential capital gains tax if they sell the property for more than its stepped-up basis.
With smart planning using the strategies I’ve outlined, you can minimize or even eliminate these taxes. The stepped-up basis is your biggest advantage here, potentially saving you thousands in taxes.
I always recommend consulting with a tax professional who specializes in inheritance and estate planning to make sure you’re making the most tax-efficient decisions for your specific situation.
Have you inherited a house or are you planning to leave one to your heirs? What tax questions do you still have? I’d love to hear from you in the comments below!
Pennsylvania
Spouses and children 21 years old and younger are exempt. Adult children, grandparents, and parents are exempt up to $3,500. The tax rate is 4. 5%, 12%, or 15%, depending on the relationship.
Nebraska
Spouses, relatives under the age of 22, and charities are fully exempt. Immediate family members (parents, grandparents, siblings, children, grandchildren) are exempt up to $100,000 and pay a 1% tax on inheritances exceeding that amount. Other relatives are exempt up to $40,000 or are subject to an 11% tax, while unrelated heirs are exempt up to $25,000 or pay 15%.
How Do I Leave An Inheritance That Won’t Be Taxed?
FAQ
When you inherit a house, is it taxable?
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 do I avoid inheritance tax on my parents’ house?
Putting things in a trust protects them from estate or inheritance taxes after the person who set up the trust dies. This is because the assets don’t legally belong to the person who set up the trust. Setting up a trust also has other financial benefits, such as helping the estate avoid probate.
What is the maximum amount you can inherit without paying inheritance tax?
There’s normally no Inheritance Tax to pay if either:the value of your estate is below the £325,000 threshold. you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.
How much can you inherit without paying federal taxes?
While state laws differ for inheritance taxes, an inheritance must exceed a certain threshold to be considered taxable. For federal estate taxes as of 2024, if the total estate is under $13. 61 million for an individual or $27. 22 million for a married couple, there’s no need to worry about estate taxes.
Do I have to pay taxes on an inheritance?
It’s important to know when you might have to pay taxes on an inheritance. Here are some rules to help you do that: The first rule is simple: If you receive property in an inheritance, you won’t owe any federal tax. That’s because federal law doesn’t charge any inheritance taxes on the heir directly.
Do you owe state tax on inherited property?
A: Yes, but only in a few places. Most states do not tax inheritances. If the person who died lived or owned property in one of the five states with an inheritance tax (Md., PA, NJ, NE, or KY), you may have to pay state tax on what they left you. Otherwise, no state inheritance tax applies.
Do you pay taxes on inherited assets?
The amount due will depend on the value of the inherited assets. The United States does not levy a federal inheritance tax, but some states have their own inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. More on state rules, exemptions, and rates below.
Does inheriting a house affect property taxes?
The act of inheriting a property doesn’t trigger any automatic tax liability, but what you decide to do with the house — move in, rent it or sell it — will cause you to incur property taxes, capital gains taxes or other expenses (more on that below). What are capital gains taxes?
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%.
When do you pay inherited property taxes?
Estate and inheritance taxes typically need to be paid shortly after the decedent’s death, while capital gains taxes only apply if and when you sell the inherited property. Need Help with Inherited Property Taxes?