Receiving an inheritance can be both a blessing and a source of confusion. Many beneficiaries assume inherited assets are fully taxable, while others believe there are no tax consequences at all.
The tax treatment of inherited assets depends on several factors, including:
- the type of asset inherited;
- whether the estate is subject to estate tax; and
- what actions the beneficiary takes after receiving the inheritance.
Are Inheritances Taxable?
One of the most common questions beneficiaries ask is whether they must pay income tax on an inheritance. In general, property and assets received through inheritance are not subject to federal income tax when they are inherited. However, that does not mean inherited assets are entirely tax-free.
Depending on the circumstances, beneficiaries may face:
- Capital gains tax when inherited assets are sold
- Income tax on inherited retirement accounts
- Estate taxes paid by the estate before distribution
- State inheritance or estate taxes in certain states
Understanding the Step-Up in Basis Rule
One of the most valuable tax benefits available to beneficiaries is the step-up in basis. Under current federal tax law, most inherited assets receive a basis adjustment to their fair market value on the decedent’s date of death. Assets that commonly qualify for a step-up in basis include:
- Stocks and mutual funds
- Real estate
- Business interests
Inherited Real Estate
Real estate is one of the most commonly inherited types of assets. Inherited property generally receives a step-up in basis. It is best to have inherited property appraised as of the date of death so the step-up in basis can be accurately calculated. Beneficiaries often owe little or no capital gains tax if the property is sold shortly after inheritance because of the step-up in basis. If the property is held and appreciates further, it is important to keep documentation showing the property’s fair market value as of the date of death.
Inherited Stocks and Investments
Retirement accounts are often the most misunderstood inherited assets because they generally do not receive a step-up in basis. Withdrawals from inherited traditional retirement accounts are typically taxable as ordinary income.
Under the SECURE Act’s 10-year rule, most non-spouse beneficiaries who inherit retirement accounts must fully distribute the account within 10 years of the original owner’s death. Depending on the type of account and whether the original owner had already begun taking required minimum distributions, annual distributions may also be required during that 10-year period.
Inherited Roth IRAs are often more favorable. Although distribution rules still apply, qualified withdrawals are generally tax-free because the taxes were already paid by the original account owner.
Estate Tax vs. Inheritance Tax
Federal Estate Tax
The federal estate tax applies to the estate itself before assets are distributed to beneficiaries. Only very large estates are subject to federal estate tax due to the annually adjusted exemption. For 2026, the federal estate tax exemption is $15 million per individual.
State Estate and Inheritance Taxes
Some states impose their own estate or inheritance taxes with lower exemption thresholds than the federal government.
For Georgia residents, Georgia does not impose a state inheritance tax or state estate tax.
Our Tax Planning Tips for Beneficiaries
- Do not rush to sell inherited assets without understanding the tax consequences
- Obtain date-of-death fair market values for all inherited assets
- Understand retirement account rules, including when distributions must be taken
- Coordinate with tax and financial advisors before selling inherited investments or real estate.
