Inherited House vs Inherited IRA: How Taxes Work Differently in Indiana

If you inherited both a house and a retirement account in Indiana, the tax treatment is dramatically different — and confusing the two is one of the most expensive mistakes beneficiaries make. The inherited house almost certainly gets a step-up in basis that eliminates capital gains tax if you sell it promptly. The inherited IRA gets no step-up at all — every dollar you withdraw is taxed as ordinary income. Understanding this distinction before you make any decisions about selling or withdrawing can save you tens of thousands of dollars.

Indiana has no inheritance tax (repealed in 2013) and no state estate tax. But that doesn't mean inherited assets are tax-free. The taxes that matter are capital gains on the house and ordinary income tax on the IRA — and the rules for each are almost opposite.

The Two Rules That Matter

How the Step-Up in Basis Works on an Inherited House

When someone dies owning a house in Indiana, the property's tax basis "steps up" to its fair market value on the date of death. This eliminates all the capital gains that accumulated during the deceased owner's lifetime.

Here's the math: if a parent bought a house in Indianapolis for $65,000 in 1990 and it's worth $310,000 when they die, your tax basis as the beneficiary is $310,000 — not $65,000. If you sell the house for $310,000, your capital gain is zero. No federal capital gains tax. No Indiana capital gains tax. The entire $245,000 of historical appreciation is wiped from the tax ledger.

This is why selling an inherited house quickly — within months of the death, while its value is close to the date-of-death appraisal — often results in little to no tax liability. The longer you hold it, the more the property's value can diverge from the stepped-up basis, creating a taxable gain.

If a Transfer on Death (TOD) deed was recorded before the death under IC 32-17-14, the property passes outside of probate and still receives the full step-up in basis. The beneficiary records an Affidavit of Survivorship with the county recorder (typically $25) and the property is theirs — no court involvement required.

Why Inherited IRAs Are Completely Different

Traditional IRAs, 401(k)s, and 403(b)s are classified as Income in Respect of a Decedent (IRD). The deceased never paid income tax on this money — it went in pre-tax. Because the tax was never paid, the IRS doesn't reset the basis at death. The full balance is taxable as ordinary income when withdrawn.

If you inherit a $200,000 traditional IRA and withdraw it all in one year, you'll owe federal income tax at your marginal rate (potentially 22-32% depending on your other income) plus Indiana's flat 3.05% state income tax. On a $200,000 withdrawal, that could mean $50,000-$70,000 in combined taxes.

Under the SECURE Act, non-spouse beneficiaries must empty an inherited IRA within 10 years of the original owner's death. There's no requirement to take annual distributions — you can take it all in year one, spread it across all ten years, or wait until year ten. But the strategy matters enormously for your tax bill.

Spreading a $200,000 inherited IRA across 10 years ($20,000 per year) keeps each withdrawal in a lower tax bracket. Taking it all at once pushes you into higher brackets and can trigger additional consequences like increased Medicare premiums.

The one exception: Roth IRAs. If you inherit a Roth IRA, withdrawals are generally tax-free because taxes were already paid on the contributions. The 10-year distribution rule still applies, but the tax impact is zero. Roth IRAs also don't get a step-up in basis — but they don't need one, because distributions aren't taxable anyway.

The Practical Decision Tree

You inherited a house in Indiana:

1. Get a professional appraisal (or use the county assessor's value) documenting fair market value at the date of death
2. If selling promptly, your capital gain is likely zero — list on the open market for full value
3. Do not sell to a cash investor at a steep discount out of tax fear — the step-up eliminates the tax concern
4. Notify the county auditor within 60 days if the property had a homestead deduction — missing this triggers a three-year retroactive penalty
5. If keeping the property, document the stepped-up basis now so you have it when you eventually sell

You inherited a traditional IRA:

1. Do not withdraw the full balance in one year unless you absolutely need the cash — the tax hit is severe
2. Consult with a CPA or use a tax projection tool to plan withdrawals across the 10-year window
3. Consider years when your other income is lower (between jobs, early retirement) as optimal withdrawal years
4. Remember: Indiana's flat 3.05% state income tax applies on top of federal rates
5. If the IRA is a Roth, withdrawals are tax-free — but you still must empty it within 10 years

You inherited both:

This is the most common scenario, and the interaction matters. If selling the house produces zero capital gains (thanks to the step-up) but the IRA withdrawals are fully taxable, you may want to sell the house in the same year you take a larger IRA distribution — because the house sale won't push you into a higher bracket. Alternatively, if the house sale does produce some capital gain (because you held it and the value increased), coordinate the timing with your IRA withdrawals to minimize the combined bracket impact.

Who This Is For

• Indiana beneficiaries who inherited a combination of real estate and retirement accounts
• Family members trying to decide whether to sell an inherited house immediately or hold it
• Heirs who received an inherited IRA and need a withdrawal strategy that minimizes taxes
• Anyone who's heard conflicting advice about "estate taxes" and "capital gains" on inherited property
• Executors advising beneficiaries on the tax implications of different distribution options

Who This Is NOT For

• Beneficiaries who inherited only cash or bank accounts (no capital gains or IRA withdrawal issues)
• Estates large enough to trigger the federal estate tax ($15 million+ under 2026 law) — those require Form 706 strategy
• Situations involving inherited business interests or farmland with complex valuation methods

Frequently Asked Questions

Does Indiana tax inherited property when I receive it?

No. Indiana has no inheritance tax and no state estate tax. You owe nothing simply for receiving inherited property. Taxes only arise when you sell the property (capital gains) or withdraw from an inherited retirement account (income tax). The step-up in basis on real estate typically eliminates the capital gains concern if you sell shortly after inheriting.

Can I avoid taxes on an inherited IRA by rolling it into my own IRA?

Only if you're the surviving spouse. Spousal beneficiaries can roll the inherited IRA into their own IRA and treat it as if it were always theirs — no 10-year withdrawal requirement. Non-spouse beneficiaries (children, siblings, friends) cannot do this and must follow the 10-year rule.

What if the house has a mortgage — does the step-up still apply?

Yes. The step-up in basis applies to the property's full fair market value, regardless of any outstanding mortgage. If the house is worth $300,000 with a $100,000 mortgage remaining, your stepped-up basis is $300,000. If you sell for $300,000 and pay off the mortgage, your capital gain is zero — you net $200,000 with no capital gains tax.

How do I document the stepped-up basis on an inherited house?

Get a professional appraisal or a Comparative Market Analysis (CMA) from a real estate agent as close to the date of death as possible. Keep this documentation permanently — you'll need it when you sell, whether that's six months or twenty years from now. The county assessor's assessed value can serve as a starting reference but a formal appraisal is stronger evidence.

Where can I get the full Indiana estate tax filing sequence?

The Indiana Final Tax & Estate Tax Guide covers every post-death tax obligation — from the final IT-40 through estate closure — in chronological order, including step-up documentation, IRA withdrawal planning, and all Indiana-specific forms and deadlines.

See more Indiana guides →