Do You Pay Taxes on Inherited Property or Money?
After receiving an inheritance from a loved one after they pass, one of the first questions that comes to mind is, “Are these inherited assets taxed?” The answer isn’t a clear-cut “yes” or “no.” Whether or not you pay taxes - and how much - depends on the type of inherited property you received, the tax laws in your state, and the overall value of the estate.
Below, we’ll explain the types of inheritance taxes, how the amount of inheritance taxes can be legally reduced, and specific considerations depending on the state you reside in. We’ll break it down in easy-to-understand lingo.
Common Types of Taxes on Inheritance
Federal Estate Tax
As of 2025, this pre-distribution estate tax is only applied to estates with a value of $13.99 million or more. The current federal estate tax ranges from 18% to 40%.
Federal estate tax isn’t applicable to estates that don’t exceed beyond the latter amount. Therefore, most estates aren’t taxed on a federal level.
Estate and Inheritance Taxes
Some states have inheritance and/or estate taxes:
Estate Tax: Paid by the estate before assets are distributed to beneficiaries
Inheritance Tax: Paid by the beneficiary after they receive inherited assets
As of 2025, 15 states, along with the District of Columbia, impose an estate tax. These states include Minnesota, New Jersey, New York, Kentucky, Illinois, Maine, Connecticut, Vermont, Oregon, Pennsylvania, Hawaii, Rhode Island, Washington, Maryland, and Massachusetts.
As of 2025, there are only five states that currently have an inheritance tax. These states include Maryland, Kentucky, New Jersey, Pennsylvania, and Nebraska. However, even for those living in these states, immediate family members are typically exempt from inheritance tax or are taxed at a reduced rate.
Capital Gains Tax
Sometimes when you inherit an asset, you aren’t automatically taxed right then and there. If you later go to sell that asset, you may be subject to capital gains tax, which is imposed on the profit you earn from selling that item.
Here’s how your capital gains tax is calculated:
Your sales price minus your stepped-up basis = your capital gain (which is the amount you’d be taxed on)
Your stepped-up basis is the current fair market value at the time you inherit an asset.
For example, if you inherit a house with a stepped-up basis (or current fair market value) of $500,000 and sell it for $550,000, your capital gain would be $50,000. Therefore, your capital gains tax would be applied to that $50,000.
Additional Taxes on Certain Assets
In most cases, the assets you inherit aren’t subject to income tax. Although, some types of inheritance are considered income and, thus, are further taxed.
Income-taxed inheritance includes:
401(k)s
Traditional IRAs
Annuities
Unpaid wages or bonuses
How to Reduce Inheritance/Estate Taxes
There are ways to legally reduce the amount of inheritance or estate taxes owed, as follows:
Gift Tax Exclusion
For 2025, the annual gift tax exclusion is $19,000 per recipient. This means you can gift up to $19,000 per person without that gift being deemed taxable.
Irrevocable Trusts
When the grantor, the owner of the trust, transfers assets into an irrevocable trust, they lose control over those assets. As a result, estate taxes do not apply to irrevocable trusts.
The estate tax exclusion of irrevocable trusts can be especially useful for those with larger estates.
Charitable Contribution
When one makes a charitable donation through their will or trust, this can reduce how much tax they owe on their entire estate.
Roth Conversions
When you convert assets in a traditional retirement account into a Roth IRA, your taxable estate value is lowered. What is more, the assets you have in a Roth IRA, plus any interest you accumulate, is not subject to estate tax.
Considerations Based on State
Taxes on inheritance and estates vary from state to state, with thresholds, exemptions, and tax rates differing. Not to mention, most states don’t have inheritance or estate taxes, and for the ones that do, they often only impose one of the two.
On the other hand, states like California don’t have either an inheritance or estate tax. California got rid of its inheritance tax in 1982 and its estate tax in 2005. However, federal taxes still apply if the estate meets a certain value.
Would if the Heir Lives in a Different State Than the Predecessor?
Whether taxes apply in the heir’s state or the predecessor’s state depends on the type of tax in question.
Estate taxes, since they are taxed before distributions are made, are usually based on the state where the deceased person lived.
Inheritance taxes, which are levied after assets are distributed, would be taxed based on the state the beneficiary or recipient lives in.
Example:
Say you’re the beneficiary and reside in California (where there are no estate or inheritance taxes), and your predecessor lived in Maryland (where there are both estate and inheritance taxes). Estate tax would be applicable since the deceased individual lived in a state where estate taxes are imposed. However, you wouldn’t pay inheritance taxes since California doesn’t impose such, even though Maryland does. If you lived in Maryland or another state where an inheritance tax is imposed, then you would owe it.
With so many rules, exemptions, and tax structures - and not to mention, different types of taxes involved - paying taxes on inherited property or monetary assets can quickly become confusing. When in doubt, reach out to a local estate planning attorney.
Conclusion
When you inherit property, money, or other assets, taxes often come to mind. Do you owe them, and how much? It’s not so black and white. Inheritance tax depends on the type of assets you inherited, the value of such, and the state you reside in. Meanwhile, estate taxes - whether or not they are owed and how much - depends on where the predecessor resided.
One thing is for certain: federal taxes aren’t applicable to most estates. However, with other inheritance taxes to consider, like state taxes and capital gains, these are likely to apply to the inheritance you received.
In the end, working with an estate attorney can help you best navigate this process and learn about the taxes owed depending on the specific circumstances.