If you inherit money or property, one of the first questions that comes to mind is: Will I owe taxes on this?
The short answer is it depends. Different assets have different rules, and knowing those rules can make a big difference for you and your beneficiaries.
Here’s a breakdown of how inheritances are typically taxed and what planning opportunities may exist.
Estate Tax vs. Inheritance Tax: What’s the Difference?
Many people use “estate tax” and “inheritance tax” interchangeably, but they are not the same.
- Estate tax is taken from the deceased person’s estate before assets are distributed.
- Inheritance tax is applied to the beneficiary after receiving the inheritance.
As of 2025, only five states levy an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Federally, the estate tax only applies to estates larger than $13.99 million for single filers or $27.98 million for married couples. For most families, federal estate tax is not an issue.
Inheriting Brokerage Accounts (Stocks, Mutual Funds)
When you inherit stocks or mutual funds, you generally receive a step-up in basis.
- The cost basis resets to the investment’s value on the date of the original owner’s death.
- If you sell the investment, you only pay capital gains tax on any growth after that date.
- Gains that accumulated during the original owner’s lifetime are not taxable to you.
This feature can also influence charitable giving strategies. For example, leaving IRA money to charity and brokerage accounts to heirs often creates better tax outcomes.
Inheriting Retirement Accounts (IRAs, 401(k)s, TSP)
Tax-deferred accounts are treated differently:
- Spouses can roll the funds into their own IRA without immediate taxation.
- Non-spouse beneficiaries must use an inherited IRA and follow the 10-year rule.
That means all funds must be withdrawn within 10 years of the original owner’s death. If the owner was already taking Required Minimum Distributions (RMDs), the beneficiary must continue them until the account is emptied by year 10.
For traditional IRAs, 401(k)s, or TSP accounts, those withdrawals are taxable. For Roth IRAs, the 10-year withdrawal rule still applies, but distributions are generally tax-free.
Planning insight: For inherited traditional accounts, spreading withdrawals evenly over 10 years may help manage taxes. For inherited Roth accounts, waiting until year 10 may maximize tax-free growth.
Inheriting Real Estate
Like brokerage accounts, inherited real estate also receives a step-up in basis.
- If you sell the property shortly after inheriting it, you typically owe no tax.
- If you hold onto it and sell years later, you’ll pay capital gains tax on the appreciation since the date of inheritance.
For Example: If you inherit a $500,000 home and sell it right away, no tax is due. If you sell it years later for $600,000, you’d pay tax only on the $100,000 in growth.
Special Rules for the TSP
The federal Thrift Savings Plan (TSP) has its own quirks.
- A surviving spouse can transfer TSP funds into a beneficiary participant account with no immediate tax consequences.
- However, when that spouse later passes away, the next beneficiary cannot continue the account. They are required to take a 100% taxable distribution in one year.
This rule makes planning around TSP inheritances especially important.
Key Takeaways
- Not all inheritances are taxed the same way.
- Brokerage accounts and real estate benefit from the step-up in basis.
- Retirement accounts follow the 10-year rule and may create significant taxable income.
- The TSP has unique restrictions that can create unintended tax burdens for heirs.
Knowing these rules and planning accordingly can make a significant difference in how much wealth ultimately passes to your loved ones.
We Are Here to Help
If you’d like to make sure your inheritance planning is on track, talk with an advisor who understands both federal benefits and the tax code.
At Christy Capital Management, we help federal employees and their families prepare wisely for the future.
