You generally cannot be taxed simply for receiving an inheritance, so the way to avoid paying taxes on inherited property is to manage what happens next: use the step-up in basis when you sell, time the sale into a low capital gains bracket, live in an inherited home long enough to claim the residence exclusion, spread withdrawals from inherited retirement accounts across the ten-year window, and, in the right situation, disclaim the inheritance so it passes to someone in a lower bracket. Each of those moves targets a different pressure point, and most heirs use more than one.
Receiving the Inheritance Is Not a Taxable Event
The Internal Revenue Code excludes property acquired by bequest or inheritance from gross income. Cash, a house, stocks, a share of a family business — none of it goes on your federal return as income, and the size of the inheritance doesn’t change that.
What is taxable is what the property earns after it becomes yours. Rent from an inherited rental, dividends on inherited stock, and interest on an inherited bank account are all ordinary income in the year you receive them. So the strategies below are about the sale, the withdrawal, or the transfer, not the inheritance itself.
Use the Step-Up in Basis
The step-up in basis is the single most valuable tax benefit available to heirs. On the date of death, the tax basis of the decedent’s property resets to its fair market value. Every dollar of appreciation that built up during their lifetime disappears for tax purposes, so if you sell soon after inheriting, you owe little or no capital gains tax.
A parent who bought a house in 1990 for $100,000 and died when it was worth $500,000 leaves you a basis of $500,000. Sell it for $510,000 and your taxable gain is $10,000. Without the step-up, the gain would be $410,000. The savings routinely run into five or six figures.
The step-up applies to nearly all inherited capital assets: real estate, stocks, mutual funds, business interests. In some cases the executor of an estate that files a federal estate tax return can elect an alternative valuation date six months after death, but only if that lowers the estate’s total value.
Document the Value on the Date of Death
The step-up only helps if you can prove what the property was worth when the decedent died. For real estate, get a professional appraisal dated around the time of death. For publicly traded securities, use the closing price on the date of death. For bank and brokerage accounts, keep the statement covering that date.
If the estate files a federal estate tax return, the executor must report basis to the IRS and to beneficiaries on Form 8971 and Schedule A. If you receive a Schedule A, use the value it shows. Reporting a different basis on your own return can trigger a 20% accuracy-related penalty.
Time the Sale to Hit a Low Capital Gains Bracket
If you do sell for more than the stepped-up basis, the profit is a capital gain. Inherited property automatically qualifies for long-term rates regardless of how long you personally held it, because the decedent’s holding period carries over.
For 2026, long-term capital gains rates are:
- 0% on taxable income up to roughly $49,450 for single filers or $98,900 for married couples filing jointly
- 15% on income from those thresholds up to about $545,500 (single) or $613,700 (joint)
- 20% on income above those amounts
High earners also pay a 3.8% Net Investment Income Tax on capital gains once modified adjusted gross income passes $200,000 (single) or $250,000 (joint). Those thresholds are not indexed for inflation, so they pull in more taxpayers each year. At the top, the combined federal rate on a gain can reach 23.8%.
The planning move is to sell in a low-income year. If you are between jobs, newly retired, or otherwise expecting a lean year, running the inherited-property sale through that window can drop part or all of the gain into the 0% bracket. This works particularly well when the step-up already erased most of the built-in gain and only a small profit remains.
Move In and Claim the Primary Residence Exclusion
If you inherit a home and make it your main home, you can eventually exclude up to $250,000 of gain from the sale ($500,000 for a married couple filing jointly). Stacked on top of the stepped-up basis, this exclusion can shelter a great deal of appreciation.
You need to meet two tests. The ownership test requires you to have owned the home for at least two of the five years before selling. The use test requires you to have lived in it as your main home for at least two of those five years. The two years don’t have to be consecutive. Inheriting the property counts toward ownership, but you still have to actually live there to satisfy the use test.
Partial Exclusion for Early Sales
If a change in employment, a health issue, or certain unforeseen circumstances forces you to sell before hitting two years of use, you may qualify for a partial exclusion. It is proportional: live there 12 months out of the required 24 and you can exclude half of the maximum, so $125,000 for a single filer or $250,000 for a married couple.
Spread Withdrawals From an Inherited Retirement Account
Retirement accounts are the big exception to the rule that inheritances are not taxed as income. Distributions from an inherited traditional IRA or 401(k) come out as ordinary income at your regular rate, and there is no step-up in basis. This is the most tax-intensive category of inherited property most heirs will see.
If You Are the Surviving Spouse
A surviving spouse has the most room to maneuver. You can roll the account into your own IRA, wait until your own required beginning date to take distributions, and then withdraw on your own life expectancy schedule. The money keeps growing tax-deferred for as long as possible.
If You Are Any Other Beneficiary: The 10-Year Rule
Under the SECURE Act, most non-spouse beneficiaries who inherit from someone who died in 2020 or later must empty the account by the end of the tenth year after the account holder’s death. Every dollar you pull from a traditional IRA or 401(k) is taxable income in the year you take it. Waiting until year ten and draining the account at once can throw you into a much higher bracket; spreading withdrawals across the decade, weighted toward your lowest-income years, is almost always the better play.
Eligible Designated Beneficiaries
A narrow group can still stretch distributions over their own life expectancy instead of following the 10-year rule: surviving spouses, minor children of the account holder (the 10-year clock starts once they reach the age of majority), disabled or chronically ill individuals, and any beneficiary no more than 10 years younger than the decedent.
Inherited Roth IRAs
Inherited Roth IRAs follow the same distribution timelines, but the tax treatment is far kinder. As long as the original owner’s Roth was open at least five years, withdrawals of both contributions and earnings are tax-free. Non-spouse beneficiaries still have to empty the account within ten years, but they owe no income tax on the way out.
Disclaim the Inheritance
Sometimes the cleanest way to avoid tax on inherited property is not to accept it. A qualified disclaimer lets the property pass to the next beneficiary in line, often a spouse or child in a lower bracket, without being treated as a gift from you. For tax purposes, the property is treated as if it was never yours.
The rules are strict. The disclaimer has to be an irrevocable, written refusal delivered to the executor or whoever holds legal title within nine months of the date of death (or within nine months of your 21st birthday, if you were a minor). You cannot have accepted any benefit from the property first, and you cannot dictate where it goes after you refuse. It has to pass under the existing estate plan or state intestacy rules.
Disclaiming makes sense when accepting would push you into a higher bracket, when the property would create estate tax problems in your own estate later, or when the next person in line would simply benefit more. Parents often disclaim in favor of their children, who may have lower rates and longer time horizons for tax-deferred growth.
Do Not Disclaim if You Are on Medicaid
Anyone receiving Medicaid long-term care benefits cannot just walk away from an inheritance. Federal law requires Medicaid recipients to accept inheritances and report them to the state Medicaid agency, typically within 10 days. Disclaiming or giving away inherited assets during Medicaid’s 60-month look-back period can trigger a penalty period of ineligibility. Talk to an elder law attorney first.
Know Where Estate and Inheritance Taxes Actually Bite
Federal estate tax is not something most heirs need to plan around. For 2026 the exemption is $15 million per individual, or $30 million for a married couple. The One Big Beautiful Bill Act, signed in July 2025, made that elevated exemption permanent and repealed the scheduled sunset. Estates below the threshold owe zero federal estate tax, and fewer than one in a thousand estates owes any. Above the threshold, the top rate is 40%, applied only to the excess.
State-level taxes are a different story, and the exemptions are often far lower. Twelve states and the District of Columbia impose their own estate tax, with exemptions ranging from $1 million in Oregon up past $13 million in Connecticut, and rates that can reach 12% to 20%. Five states — Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — tax the heir directly through an inheritance tax; Iowa eliminated its inheritance tax effective January 1, 2025. Spouses are exempt in every inheritance-tax state, children and grandchildren are usually exempt or lightly taxed, and more distant or unrelated heirs face the highest rates, reaching 15% to 16% in Kentucky and New Jersey. Maryland imposes both. If the decedent lived in, or owned real property in, one of these states, check the state rules before assuming the estate is in the clear.
Consider a 1031 Exchange if You Keep and Grow Investment Property
If you inherit a rental or other investment property and later want to swap it for a different one without triggering tax, a 1031 like-kind exchange defers the capital gain when you reinvest the proceeds into another investment property of equal or greater value within the required time limits.
Right after inheritance, a 1031 usually isn’t necessary. The stepped-up basis already erased the built-in gain, so there is little to defer. The exchange becomes useful later, if you hold the property for several years and it appreciates substantially before you sell. At that point, exchanging into a replacement property keeps the capital invested and postpones the tax.