The good news is no matter if you decide to move into an inherited home or keep it as a rental, so long as you itemize your deductions, you'll be able to deduct the property taxes.
All About the Stepped-Up Basis Loophole. A stepped-up basis is a tax provision that allows heirs to reduce their capital gains taxes. When someone inherits property and investments, the IRS resets the market value of these assets to their value on the date of the original owner's death.
If You Inherit Property, You Won't Necessarily Pay Taxes
There are no federal inheritance taxes and only six states levy any form of inheritance tax. Given the state-specific nature of inheritance taxes, this subject is beyond the scope of this article.
Unless your parents put their estate in trust, their assets will go into probate. Even if you have lived there all your life, it will go to probate. If you are the only child then it will all likely go to go. If there are siblings, you may have to sell the house to divide the estate.
Inherited properties can come with financial responsibilities such as existing mortgages, unpaid property taxes, maintenance costs, and insurance requirements. Be aware of hidden costs, including emergency repairs, property management fees, and legal expenses.
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income.
In most cases, an inheritance isn't subject to income taxes. The assets passed on in an investment or bank account aren't considered taxable income, nor is life insurance. However, you could pay income taxes on the assets in pre-tax accounts.
Upon selling an inherited asset, if the inherited property produces a gain, you must report it as income on your federal income tax return as a beneficiary.
“Cash is king when it comes to leaving an inheritance,” said Carbone. “It's the simplest asset to deal with in terms of a transfer.”
Your share of sales proceeds (generally reported on Form 1099-S Proceeds From Real Estate Transactions) from the sale of an inherited home should be reported on Schedule D (Form 1040) Capital Gains and Losses in the Investment Income section of TaxAct.
The holding period begins on the date of the decedent's death. When inherited property that is a capital asset is disposed of, the taxpayer has a long-term gain or loss regardless of how long they held the property.
You can deduct your mortgage interest payments even when the deed to the house and the mortgage are in someone else's name.
Yes, rental income from an inherited property is taxable. As the new owner, you are responsible for paying property taxes on the home. Additionally, the income derived from renting out the property is considered passive income, which is taxable, and must be reported on your tax returns.
Deductible house-related expenses
The costs the homeowner can deduct are: State and local real estate taxes, subject to the $10,000 limit. Home mortgage interest, within the allowed limits.
There are four ways you can avoid capital gains tax on an inherited property. You can sell it right away, live there and make it your primary residence, rent it out to tenants, or disclaim the inherited property.
If the estate taxes are unpaid, trustees, transferees, or beneficiaries become liable for the unpaid estate taxes through IRC §6324(a)(2). Here, the estate failed to keep up with the installment payments causing the IRS to terminate the §6166 election and issue a notice of final determination under 26 U.S.C. §7479.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024 and $13.99 million in 2025, and the federal estate tax rate ranges from 18% to 40%.
If you are inheriting a house that is paid off, in most cases, you will still need to go through probate. Some states may allow you to bypass probate if a quitclaim deed was executed properly. However, it is likely that you will still need to go through probate even if you are inheriting a house with no mortgage.
Bottom Line. California doesn't enforce a gift tax, but you may owe a federal one. However, you can give up to $19,000 in cash or property during the 2025 tax year and up to $18,000 in the 2024 tax year without triggering a gift tax return.
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.
While each situation is unique and other factors might influence the decision, from a tax perspective, inheriting a property is often more beneficial than receiving it as a gift. Considering the overall estate planning strategy and potential non-tax implications is crucial.
Beck, Lenox & Stolzer Estate Planning and Elder Law, LLC, knows from experience how bad behavior can erupt among the siblings as well. Many people think children automatically inherit a house when their parents die, but this isn't true. It's possible for children to inherit without a will, but it doesn't always happen.