What Are the Tax Implications of an Inheritance?

Below is a breakdown of the most common types of inherited assets and how each is treated from a tax standpoint.

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1. Taxable Investment Accounts and Bank Accounts

If you inherit a brokerage account or a bank account that is not inside a retirement plan, the good news is that there is usually no income tax owed simply for receiving the assets.

For investment accounts, what matters most is cost basis. At the time of death, most inherited assets receive what is called a step-up in basis. That means your new cost basis is equal to the market value on the date of death. If your parent bought shares of a stock years ago at $20 per share, and they were worth $80 when they passed away, your new basis is $80. If you later sell the stock for $85, you only pay capital gains tax on the $5 difference, not the entire $65 of unrealized gain.

This rule can eliminate significant tax exposure for heirs and provides flexibility to either hold or sell without triggering large capital gains.

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2. IRAs and Other Retirement Accounts

Inherited IRAs, 401(k)s, and similar accounts work very differently. These are typically pre-tax accounts, meaning income taxes were deferred by the original owner. Now, the tax bill becomes the beneficiary’s responsibility.

When you inherit a traditional IRA, you will pay ordinary income tax on any distributions you take. The entire balance must be distributed within 10 years for most non-spouse beneficiaries, as required by the SECURE Act. That doesn’t mean you need to withdraw one-tenth each year, but the account must be emptied by the end of year ten.

If you are in your peak earning years, inheriting a large IRA can push your income higher, and may require a withdrawal strategy that spreads the tax impact out over several years.

Spouses have more flexibility; they can choose to treat the account as their own or remain a beneficiary, depending on their age and long-term income plans.

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3. Roth IRAs and Roth 401(k)s

Roth accounts are generally more favorable to inherit. These accounts are funded with after-tax dollars, so no income tax is due on distributions as long as the account has been open for at least five years.

Even though the SECURE Act also requires inherited Roth IRAs to be emptied within 10 years (unless you are a spouse or otherwise exempt), the ability to take tax-free distributions gives you more control. Many heirs choose to leave the funds invested for as long as possible within the 10-year window to take full advantage of the tax-free growth.

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4. Real Estate and Personal Property

Real estate, like investment accounts, receives a step-up in basis. If your parent bought a home for $200,000 and it was worth $500,000 at the time of death, that $500,000 becomes your new cost basis. If you sell the property soon after inheriting it, your taxable gain may be minimal or even zero.

If you choose to keep the property and rent it out, you can take depreciation deductions against rental income, but will eventually face capital gains taxes if the property appreciates further and is later sold.

Personal property, such as artwork, vehicles, collectibles, or furniture is handled similarly. The step-up in basis applies, and there is usually no tax due upon inheritance. However, if you later sell the items and the sale price exceeds the stepped-up value, you may owe capital gains tax.

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5. Intangible Assets (E.g., Cryptocurrency, Music Rights, Intellectual Property)

Assets that fall into more specialized categories—such as cryptocurrency, digital royalties, trademarks, or ownership interests in private companies—are also generally treated as capital assets and benefit from a step-up in basis.

For example, if you inherit 1 Bitcoin token that were originally purchased at $1,000 but is worth $110,000 at the time of death, your new basis is $110,000. If you sell them for $120,000 at a later date, you will only owe tax on the $10,000 of gain.

In some cases, intellectual property assets produce income after the original owner's death. Royalties from music catalogs, streaming rights, or patents are considered income in respect of a decedent (IRD) and are taxed as ordinary income to the beneficiary when received. These scenarios can be more complex and often require good documentation and thoughtful planning.

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Final Thoughts

Every inheritance is different, but understanding the basic tax treatment of each type of asset can help you avoid surprises. Some assets are tax-deferred and must be handled with care to avoid triggering unnecessary income taxes. Others may provide you with flexibility or favorable tax treatment depending on how and when they are used or sold.

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Thank you for reading. Please review our disclosures.

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