Inheriting a house can be both a blessing and a pain. Sentimental value or financial benefits aside, receiving property from someone who died might also trigger new tax obligations.
When applicable, inheritance tax is owed within several months of receiving the home. And while the tax law applies to very few people, it’s essential to know when your inheritance might require a payment. Join us as we break down all the nuances, costs, and state-specific regulations that might apply to your property-to-be.
Inheritance taxes are taxes you pay to the government when you inherit property or assets from a deceased person. In some cases, the heir (the person inheriting the asset) also owes estate taxes and capital gains taxes as part of the distribution process. More on this below.
Still, inheritance taxes are different because beneficiaries must pay them a little later. The amount due will depend on the value of the inherited assets.
The United States does not levy a federal inheritance tax, but some states have their own inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. More on state rules, exemptions, and rates below.
Once a beneficiary receives their inherited property, they’ll pay a tax that varies depending on where the property is located, the value of the inheritance, and the relationship to the deceased.
Surviving spouses and children aged 21 or younger won’t pay inheritance taxes on a property they receive, and direct descendants will pay less than those who don’t have a familial relation. If due, the inheritance tax rate ranges between 0% and 15%.
For example, an heir who inherits a home in Pennsylvania could pay up to 15%, depending on their relationship to the deceased. If they are the living spouse, the property is not taxable. If the heir is a sibling, they’ll owe 12% inheritance tax.
To help you understand whether you’ll pay taxes on inheritances, we’ll provide state-specific examples and step-by-step calculations to clarify taxes on inheritance and determine how much tax you might owe based on your state’s regulations.
| State | Exemptions | Tax Rates |
| Iowa | No tax for inheritances less than $25,000; Exemptions for surviving spouses, stepchildren, and lineal descendants and ascendants (children, grandchildren, parents, grandparents, etc.) | 2%-6% |
| Kentucky | Exemptions for surviving spouses, parents, children, grandchildren, and siblings; $500 or $1,000 for other relatives | 4%-16%; 5% discount for taxes paid within nine months |
| Maryland | No tax for inheritances less than $1,000; Lineal descendants and siblings are also exempt | 10% |
| Nebraska | Exemptions for surviving spouses; No tax on inheritances of $40,000 or $100,000 for relatives | 1%-18% |
| New Jersey | Exemptions for spouses and civil unions, children, grandchildren and great-grandchildren, parents and grandparents; $25,000 for Class C beneficiaries (e.g., siblings) | 11%-16% |
| Pennsylvania | Exemptions for surviving spouses and children younger than 21 | 4.5%-15%; 5% discount for taxes paid within three months |
Per the Internal Revenue Service (IRS), inheritance taxes are due within nine months of the deceased’s death and should be filed with the state’s revenue department. Include property appraisals, bank statements, a list of all debts, and documents substantiating the value of inheritance.
Note: Filing a U.S. inheritance tax return can get a little tricky; seek help from a tax professional or attorney to ensure all information is correct.
Some states like Maryland, New Jersey, and Pennsylvania offer extensions, but they will likely come with interest. Conversely, Kentucky and Pennsylvania offer discounts if the tax is paid early.
If you need an extension to pay the inheritance taxes due, file a request with the state’s revenue department well before the original payment deadline. The request should include a valid reason as well as a time estimate. Keep in mind that late payments can incur penalties.
Here are a few tips to keep in mind when paying the inheritance tax on your property:
Managing taxes on an inherited property can be complex, but understanding the potential inheritance taxes, capital gains tax, and estate taxes can help reduce your tax burden.
Estate tax is a levy on the total value of a deceased person’s estate. Depending on where you live, your state may levy an estate tax or an inheritance tax. Maryland is the only state to levy both.
While inheritance taxes are what the beneficiary must pay for receiving it, estate taxes are typically paid out of the deceased person’s assets before the estate is distributed to the beneficiary.
The heir will pay a federal estate tax between 18% and 40%, but only if the value of the asset exceeds the federal threshold. If the heir lives in one of the 13 states that levy their own estate tax, they’ll pay that, too.
As of 2024, the federal exemption threshold is $13.61 million per individual ($27.22 million for a married couple). The estate tax does not apply to any assets over that amount.
Example: If an individual passes away in 2024 with an estate valued at $15 million, and the federal estate tax exemption limit is $13.61 million, the taxable amount would be $1.390 million. In this instance, the estate tax rate is 40%, so the estate would pay a base tax of $345,800 plus 40% of the amount over $1,000,000. This equals $501,800 due in taxes.
Again, the high federal threshold ensures most Americans never encounter estate taxes. But if the inheritance exceeds the limit, there are ways heirs can minimize their liability:
Capital gains tax applies to the profit made from selling an inherited property, which is the difference between the sale price and the property’s value at the time of inheritance.
Example: If you inherit a house worth $300,000 and later sell it for $350,000, you may owe capital gains tax on the $50,000 profit. If the capital gains tax rate is 15%, you would owe $7,500 in capital gains tax.
There are a few strategies to reduce or avoid to paying capital gains taxes worth considering before selling. Consult a qualified tax professional if you have questions:
Before settling into your inherited property, make sure you understand the financial implications of the gift and create a plan for paying the associated taxes. Whether an heir pays an inheritance tax or capital gains on an inherited property depends on your location, relationship with the deceased, and the value of the asset. Addressing these considerations head-on will help you make the most of your new asset.
You are going to need the deceased’s will or trust documents, the death certificate, the transfer deed of the house (property deed), and other bank statements to file the taxes. You will also need the appraisal report to establish the stepped-up basis and start the process of minimizing the tax liability. You can also keep records of expenses related to the property for tax reporting purposes.
If you’re planning on renting out the inherited property, the rental income is subject to income tax and must be reported on your tax return. You can offset a portion of your tax liability by deducting expenses related to the rental property, such as maintenance, property management fees, and depreciation. As the new owner, you are also responsible for the property taxes.
Generally speaking, U.S. citizens won’t pay a tax on foreign inheritances. However, you will have to report the gifts to the IRS if they are over a certain amount. It is usually advised to consult with a tax professional to make sure you have all your ducks in a row.
