Do I Pay Taxes on Inherited Property?

The Short Answer

Inheriting property is not a taxable event for federal income tax purposes. You won't receive a 1099 or owe income tax simply because the deed transferred to your name. But several other taxes may apply depending on what you do with the property and where it's located.

Capital Gains Tax: Only If You Sell

If you sell the inherited property, capital gains tax applies to the difference between your sale price and the property's stepped-up cost basis — its fair market value on the date the owner died, not what they originally paid for it.

If your parent bought the house for $150,000 in 1995 and it was worth $450,000 when they died, your cost basis is $450,000. Selling it for $460,000 means your taxable gain is only $10,000 — not $310,000.

This makes timing matter. Selling shortly after inheriting typically results in minimal or zero capital gains. Holding the property for years and selling after significant appreciation means a larger taxable gain, calculated from the stepped-up basis forward.

If you move into the inherited property and use it as your primary residence for at least two of the five years before selling, you may also qualify for the Section 121 exclusion: up to $250,000 in gains excluded for single filers, $500,000 for married couples filing jointly.

Property Taxes: Someone Owes Them Immediately

Property taxes don't pause for grief or probate. The county assessor continues to levy taxes on the property regardless of the owner's death, and someone must pay them to avoid a tax lien.

During probate, property taxes are typically paid from estate funds by the executor. Once the property transfers to heirs, the new owners become responsible.

Property-tax treatment after an inheritance depends on state law; a change in ownership can trigger reassessment, though some states provide exclusions for certain heirs. California's Proposition 19 (effective February 2021) significantly narrowed the parent-to-child exclusion. A child inheriting a parent's family home may qualify to retain the prior taxable value only if it was the parent's principal residence, the child makes it their own principal residence, and they file a homeowners' exemption claim within one year and a BOE-19-P claim within three years of the transfer or before transferring to a third party, whichever comes first, to claim the exclusion from the transfer date. For transfers from February 16, 2025 through February 15, 2027, the exclusion is limited to the prior factored base-year value plus $1,044,586; any excess market value is added to the new taxable value. If the child does not make or keep the home as their principal residence, the exclusion does not apply and the property is reassessed at current market value.

State Inheritance Taxes: Five States Impose Them

The federal government does not impose an inheritance tax. But five states do: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

In these states, the tax rate depends on the heir's relationship to the deceased. Spouses are universally exempt. Children and direct descendants typically pay low rates (0% to 1% in many states) or are fully exempt. More distant relatives and unrelated beneficiaries face higher rates — up to 15% or 18% in some states.

State inheritance tax is separate from state estate tax, which is levied on the estate itself before distribution. Maryland is the only state that imposes both.

Federal Estate Tax: Unlikely to Apply

The federal estate tax basic exclusion amount for a person who dies in 2026 is $15 million. A surviving spouse may be able to use a deceased spouse's unused exclusion if the estate makes the required portability election. Unless the taxable estate exceeds the available exclusion, no federal estate tax is due.

For the vast majority of inherited properties, federal estate tax is not a factor.

International Tax Considerations

Canada: No inheritance tax, but the deceased's estate faces a "deemed disposition" — the property is treated as sold at fair market value on the final tax return, triggering capital gains tax at the estate level. If the property was the deceased's principal residence, the Principal Residence Exemption may eliminate the tax entirely.

United Kingdom: Inheritance Tax at 40% applies to estate values above £325,000 (£500,000 if the home passes to direct descendants). Heirs receive a CGT uplift, resetting the base cost to probate value.

Australia: No inheritance or estate tax. Capital gains tax is deferred until the executor or beneficiary sells. If the property was the deceased's main residence immediately before death, was not then used to produce income, and the executor or beneficiary's ownership interest ends within two years, the sale is fully CGT-exempt.

What You Need to Do Now

If you've inherited property, three immediate tax-related steps protect you:

1. Get a date-of-death appraisal from a licensed appraiser. This establishes your stepped-up basis and is your defense in any future IRS review.
2. Check your state's inheritance tax rules. If you're in one of the five states, the executor must file the inheritance tax return — it's separate from the estate's income tax return.
3. Keep paying property taxes. Work with the executor to ensure current-year taxes are paid from estate funds. A tax lien can block the property transfer.

The Property & Real Estate Transfer After Death toolkit includes a stepped-up basis worksheet, a property tax responsibility tracker, and a state-by-state inheritance tax summary to help you understand exactly what you owe and what you don't.