07/21/2026
📌 Tax Topic Tuesday: What Part of an Inheritance is Taxable?
Many people assume all inheritances are tax-free, but that’s not always the case. Here’s what to know:
✅ Cash Inheritance
If you inherit cash, it is generally not considered taxable income on your federal tax return. For example, if you inherit $50,000 from a parent, you usually do not report it as income. However, if that money later earns interest in your bank account, the interest is taxable.
🏡 Inherited Property
Real estate, land, or other property is usually not taxed when inherited. The important tax rule here is the “step-up in basis.” This means the property’s value resets to its fair market value on the date of death. If you sell it later, you may only owe capital gains tax on the increase in value after you inherited it—not on the original purchase price.
An appraisal is required to determine the step-up basis at the date of death, if the home isn’t sold within 6 months. After that 6-month window, the IRS requires a formal appraisal to determine your step-up in basis in the property.
💼 Retirement Accounts (IRA / 401(k))
These can be one of the most commonly taxed inheritances. Traditional IRAs and 401(k)s are usually taxable when funds are withdrawn because taxes were deferred while the original owner was alive. Depending on your relationship to the deceased and the type of account, there may also be required withdrawal deadlines. Roth IRAs may be tax-free if requirements are met.
📈 Interest, Dividends, or Rental Income
Once inherited assets are transferred into your name, any income they generate becomes taxable to you. This includes:
• Interest from inherited cash
• Dividends from inherited stocks
• Rental income from inherited property
⚖️ Estate Taxes vs. Inheritance Taxes
These are often confused. Estate tax is paid by the estate before assets are distributed, while inheritance tax is paid by the person receiving the inheritance (only in certain states). Most estates are below the federal estate tax exemption, so this doesn’t affect many families—but state rules can vary.
📌 Bottom line: Receiving an inheritance itself often isn’t taxable, but what you inherit and what happens after can create tax consequences.
If you’ve inherited assets and want help understanding the tax impact, reach out to us to schedule a consultation.
