Capital gains taxes are then calculated, so you pay taxes only on appreciation that occurs after you inherit the property. Yahoo Finance’s recent article entitled, “Do I Pay Taxes Automatically If I Inherit Property?” says there are three main types of taxes that cover inheritances:
- Inheritance taxes are taxes that an heir pays on the value of an estate that they inherit. There are no federal inheritance taxes. However, six states have an inheritance tax.
- Estate taxes are taxes paid out of the estate before anyone inherits. The estate tax has a minimum threshold, and as with all other tax brackets, the government only taxes the amount that exceeds this minimum threshold, which is $12.92 million ($25.84 million per married couple).
- Capital gains taxes are taxes paid on the appreciation of any assets an heir inherits through an estate. They’re only levied when you sell the assets for gain, not when you inherit.
The cash you inherit is taxed through either inheritance taxes (when applicable) or estate taxes. With inheritance taxes, you must file and pay this tax.
With an estate tax, the IRS taxes the estate directly.
Therefore, it’s uncommon for an heir to owe any taxes, including income tax, on inherited cash.
The IRS does not automatically tax any other forms of property that you might inherit. However, you’ll owe capital gains taxes if you choose to sell this property.
When you inherit property, whether real estate, securities, or almost anything else, the IRS applies a stepped-up basis to that asset. This means that for tax purposes, the base price of the asset is reset to its value on the day that you inherited it. If you inherit property and immediately sell it, you’d owe no taxes on those assets.
Two prices are involved in establishing a capital gain tax: the sale price (how much you sold the asset for) and the original cost basis (how much you bought it for).
Reference: Yahoo Finance (Aug. 27, 2023) “Do I Pay Taxes Automatically If I Inherit Property?”