How is my inheritance taxed?

Tyler Kert
Tamarack Wealth Management

Inheriting assets can be both a blessing and a source of unexpected questions. After you receive an inheritance, the question usually arrives quickly: How much of this is going to be taxed? The good news is that inheritance tax rules are usually far more favorable than people expect. The bad news is that the type of asset you inherit can change the answer dramatically.

Let’s break down how inheritances are taxed based on what you actually receive.

Receiving Cash

Cash is pretty much the best inheritance you can receive from a tax standpoint. If you inherit cash, whether from a will, a trust, or a life insurance payout, that money itself is not taxable income to you. It does not get reported on your tax return and it does not push you into a higher tax bracket. You can deposit it, invest it, or spend it without triggering income tax.

Receiving Stocks and Bonds

Inheriting stocks or bonds come with one of the most powerful and misunderstood tax benefits in the entire tax code: the step-up in basis.

When someone passes away, the cost basis of any stocks and bonds that they hold outside of retirement accounts is reset to their fair market value on the date of death. That means all of the growth that occurred during the original owner’s lifetime disappears for tax purposes.

Here is a real-life example. Suppose your father bought Apple stock years ago for $20,000 and it is worth $120,000 when you inherit it. If your father sold it before he died, he would have owed tax on a $100,000 capital gain. If he gives it to you before he dies, you would also get his original $20,000 basis and then if you sold it, you would owe tax on the $100,000 gain. But, if your father dies holding the stock, you inherit a new tax basis of $120,000. If you sell the stock shortly after inheriting it for $120,000, you owe zero capital gains tax. The $100,000 of appreciation simply vanishes from the IRS’s perspective.

This is why inherited investment accounts can be extraordinarily tax efficient when handled correctly. You can sell and reposition the inherited portfolio without triggering massive tax bills.

Receiving Real Estate

Real estate inheritances, like investments, also receive a step-up in basis to fair market value on the date of death.

If you inherit a home that was purchased decades ago for $150,000 and is worth $650,000 when you inherit it, your new basis becomes $650,000. If you sell it for $650,000 shortly after inheriting it, you owe no capital gains tax.

This is one of the main reasons families often hold appreciated real estate until death rather than selling during life. The tax savings can be enormous.

Receiving an Inherited IRA

Inherited retirement accounts, especially IRAs, require special attention because they do not receive the same clean tax treatment as other inherited assets. Unlike brokerage accounts and real estate, IRAs do not receive a step-up in basis. Instead, distributions from an inherited Traditional IRA are generally taxed as ordinary income to the beneficiary. Under current SECURE Act rules, most non-spouse beneficiaries must fully distribute an inherited IRA within ten years of the original owner’s death. That means a large account can quickly push beneficiaries into much higher tax brackets if withdrawals are not carefully planned. 

Roth IRAs are much better inheritances because qualified distributions are tax-free. They are, however, still subject to the ten-year distribution window. The timing, size, and strategy around inherited IRA withdrawals can dramatically affect lifetime tax costs. This is one of the most important areas for proactive planning after a loss.

Why This Matters

The biggest mistake people make after receiving an inheritance is rushing into financial decisions without understanding the tax impact. Selling inherited assets, moving funds, or restructuring portfolios too quickly can turn a tax-free windfall into a permanent tax bill that never needed to exist.

An inheritance can be one of the most meaningful financial moments in your life. With the right planning, it can also be handled tax efficiently. Understanding how cash, investments, real estate, and IRAs are treated differently allows you to make wise decisions that will maximize the inheritance you received and protect it for your future.

Before you sell, invest, or restructure anything, pause and ask one important question: what are the tax rules tied to what I just inherited? The answer could save you tens or even hundreds of thousands of dollars.

This material is for informational purposes only and does not constitute financial, investment, or tax advice. Please consult your tax advisor or financial planner to discuss your specific circumstances before making any decisions. Securities offered through Cetera Wealth Services LLC, Member FINRA/SIPC. Advisory services offered through Cetera Investment Advisers LLC, a registered investment adviser. Cetera is under separate ownership from any other named entity.

Tyler Kert, a financial advisor and CPA, provides financial planning and tax consulting services at Tamarack Wealth Management in Cashmere, WA.