Inheriting money or property after a loved one’s death can bring both relief and confusion — especially when it comes to taxes. Many people wonder whether they’ll owe federal income tax on their inheritance, but the rules are often misunderstood. The truth is that the federal government generally does not tax inheritances as income, though there are situations where taxes may still arise.
According to the Internal Revenue Service (IRS), an inheritance is not considered earned income and is therefore not subject to federal income tax. This means that if you inherit cash, real estate, stocks, or other property, you won’t have to report that inheritance as part of your gross income on your federal tax return. The reason is simple — inherited wealth is treated as a transfer of assets, not a payment for services or labor.
For example, if you receive $100,000 from a deceased parent’s savings account, that money is entirely yours to keep without federal income tax obligations. The same rule applies to personal property, family heirlooms, and even investment accounts that transfer ownership at death. The IRS views the inheritance itself as a non-taxable event because the deceased person likely already paid income taxes on that money during their lifetime.
However, this doesn’t mean taxes can never apply. While the inheritance itself isn’t taxed, any income the inherited assets generate after you receive them is taxable. For instance, if you inherit stocks that later pay dividends, or a rental property that produces monthly rent, those earnings must be reported as income on your tax return. Similarly, if you inherit a traditional 401(k) or IRA, you’ll likely owe taxes on withdrawals, since those accounts were funded with pre-tax dollars.
Here are a few common examples of how this works:
- Inherited investments: The securities you inherit — such as stocks, bonds, or mutual funds — are not taxed at the time of inheritance. However, any dividends, interest, or capital gains earned afterward are taxable to you.
- Inherited real estate: If you inherit a home or other property, you don’t pay tax just for inheriting it. But if you later sell or rent it, the profit or rental income is taxable.
- Inherited retirement accounts: If you inherit a traditional IRA or 401(k), distributions you take are taxed as ordinary income. On the other hand, inherited Roth IRAs are generally tax-free if the account has been open at least five years.
One major benefit for heirs is the “step-up in cost basis” rule. When you inherit an asset that has increased in value — such as real estate or stocks — the IRS allows you to reset its cost basis to the market value on the date of death, not the original purchase price. This step-up means you only pay tax on gains that occur after you inherit the asset, not on appreciation that happened during the deceased person’s lifetime.
For example, if your mother bought a house for $100,000 decades ago and it’s worth $500,000 when you inherit it, your cost basis becomes $500,000. If you later sell it for $520,000, you’ll only owe capital gains tax on the $20,000 increase — not on the $400,000 growth that occurred before her death. This rule protects heirs from double taxation and drastically reduces potential tax liability.
It’s also important to consider special cases. Assets held in a trust may have different rules depending on whether the trust is revocable or irrevocable. Revocable trusts usually qualify for the same step-up in basis as personally owned assets, while irrevocable trusts might not. Similarly, if you inherit part of a family business or partnership, any profits earned after inheritance are treated as taxable income to you as the new owner.
The same applies to inherited annuities or ongoing installment payments — you won’t owe tax on the principal already taxed to the decedent, but you will owe income tax on any interest or gains included in future payments.
In summary, while receiving an inheritance isn’t taxable, what you do with it afterward can be. If the inherited assets generate income — whether through rent, dividends, interest, or distributions — that income is subject to the same tax rules as any other earnings. The IRS only cares about new income earned after the inheritance, not the inheritance itself.
Bottom line: You do not pay federal income tax on the money or property you inherit. However, once you begin to use or invest those assets, any income or profit generated becomes taxable under normal federal income tax laws. The step-up in cost basis rule minimizes taxes on appreciation before inheritance, making most transfers of inherited wealth far more tax-friendly than many people expect.
If you’re inheriting complex assets like real estate, retirement accounts, or business interests, it’s wise to consult a qualified tax advisor or estate planner to understand how the rules apply to your situation. With careful planning, you can honor your loved one’s legacy while keeping your tax obligations to a minimum.
In short:
The federal government doesn’t tax inheritances when you receive them — but it does tax the money you make from them afterward.