Step-up basis
Inherited property gets a basis equal to fair market value on the date of death. If you later sell, gain is calculated from that stepped-up basis, not the decedent's original cost. A stock position or a house held for decades arrives with its lifetime of appreciation wiped clean for tax purposes, which is why selling inherited assets soon after death often produces little or no taxable gain. Get date-of-death values documented now; they're much harder to reconstruct years later.
What doesn't get a step-up
Traditional IRAs, 401(k)s, and other pre-tax retirement accounts are 'income in respect of a decedent': every dollar distributed to you is ordinary income, exactly as it would have been to the original owner. Annuity gains and accrued savings bond interest follow similar logic. The practical effect: a $300,000 brokerage account and a $300,000 IRA are very different inheritances after tax.
Inherited IRAs
Post-SECURE Act (2020+), non-spouse beneficiaries must empty inherited traditional IRAs within 10 years. Spouses can roll to their own IRA. Planning the distribution pattern across the 10 years saves significant tax. If the original owner had already begun required distributions, annual withdrawals are also required during the 10 years, a detail finalized in recent IRS regulations that catches beneficiaries who planned to wait until year ten. Spreading withdrawals to fill your lower brackets each year usually beats one giant taxable distribution.
Inheriting a house
The stepped-up basis means a prompt sale typically generates minimal gain, and selling costs often produce a small deductible loss on inherited (non-personal-use) property. Keeping it as a rental starts depreciation from the stepped-up value, a fresh and larger deduction base. Moving in makes it your residence with the Section 121 clock starting from your occupancy. Each path is fine; they just have different tax profiles worth comparing before deciding.
Estate taxes are the estate's problem, mostly
Federal estate tax is paid by the estate, not the heirs, and applies only above a historically high exemption. Florida has no state estate or inheritance tax. If the decedent lived in one of the handful of states with an inheritance tax, that state's rules may reach you as a beneficiary, one of the few cases where the answer isn't simply 'not your bill.'
Common questions
- Is my inheritance taxable?
- Usually no. Federal inheritance isn't taxed to the recipient. Income earned after inheritance (interest, dividends, rent) is taxable to you going forward.
- Do I pay tax when I withdraw from an inherited IRA?
- Yes, traditional inherited IRA distributions are ordinary income to you, on top of your other income. That's exactly why the withdrawal schedule across the 10 years deserves planning.
- Is life insurance I received taxable?
- Death benefits are generally income-tax-free to the beneficiary. Interest the insurer pays for the period after death, if you take payments over time, is taxable.
- What paperwork should I keep?
- Date-of-death account statements and appraisals, the estate's inventory if there was one, and closing documents for any inherited real estate. Basis questions surface years later, and those records answer them.
Related
Personal Income Tax Preparation
Federal and state 1040 preparation with year-round planning. We handle W-2, 1099, K-1, rental, and crypto income for individuals in Florida and all 50 states.
Estate & Trust Tax Returns
Form 1041 preparation for estates and trusts, with K-1s for each beneficiary. We work with executors, trustees, and attorneys to file accurately and on time.
Tax Planning
Year-round tax planning for individuals and business owners. We project the year's income quarterly and model decisions before they become tax liabilities.
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