Inheriting assets can be a financial blessing, but it also raises essential tax questions that many heirs overlook. How you manage those assets can have significant tax consequences down the road.
With assets such as cash, real estate, or investments, taxes are typically not owed at the time of inheritance. The most significant exception occurs when the estate exceeds the federal estate tax threshold (which is $13.99 million for individuals in 2025). Some states also have their own estate tax thresholds (Texas does not).
Otherwise, taxes often come into play later, depending on how the assets are handled. If you hold onto property that appreciates or the assets are invested and grow in value, that’s usually where the taxes will eventually appear.
One of the most beneficial tax features for inherited property is the stepped-up basis. This means the asset’s cost basis is reset to its current fair market value. If you inherit a house originally purchased decades ago for $50,000, but it’s worth $500,000 at inheritance, your new basis is $500,000. Sell it shortly after for $500,000, and you will owe no capital gains tax. If you sell the property later for more, you pay capital gains tax on the difference between the sale price and the stepped-up basis. If you live in the home for a period of time, however, you might qualify for the home sale exclusion, which can reduce or eliminate capital gains tax on the sale.
Inherited retirement accounts have unique tax rules, which the IRS clarified recently. Currently, non-spouse beneficiaries must withdraw the entire balance of an inherited traditional IRA or 401(k) within 10 years of the original owner’s death (spouses have more flexibility). While these withdrawals are mandatory, they’re generally subject to federal income tax (and state income tax, depending on the state).
And don’t be caught holding the bag for Uncle Sam regarding inherited collectibles and alternative investments like cryptocurrency and private equity. They can be subject to unique tax rules and reporting requirements.
Business owners have additional considerations. Business interests and other complex assets require specialized tax planning to manage valuation and minimize taxes for when the unexpected happens.
Navigating the tax implications of inherited assets can be complex, especially with evolving laws and unique rules for different asset types. Proactive asset management and estate planning can help mitigate inheritance tax surprises, as can tax strategies such as rolling traditional IRAs or 401(k)s into Roth IRAs so that future growth is tax-free. Reducing these taxes for when the time comes can also help keep the inheritor’s tax rate down. Have questions? Feel free to contact us.
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