Inheriting real estate after the loss of a loved one can be both a blessing and a burden. While it may feel like a valuable gift, the process often comes with legal and financial complexities—one of the most confusing being real estate inheritance tax. 

If you’ve recently become the heir to a home or property, understanding how this tax works, when it applies, and what steps to take can help you avoid costly surprises and make informed decisions.

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What Is Real Estate Inheritance Tax?

Real estate inheritance tax refers to taxes that may be owed when a person inherits property. It's important to differentiate between three types of taxes that may affect you as a beneficiary:

1. Inheritance Tax – A tax some states charge beneficiaries based on their relationship to the deceased.
   
   
2. Estate Tax – A federal (and sometimes state-level) tax levied on the total value of the deceased person’s estate before it’s distributed to heirs.
   
   
3. Capital Gains Tax – A tax that may apply if and when you sell the inherited property for more than its fair market value at the time of the original owner’s death.

Let’s break these down in detail.

1. Does the Federal Government Tax Real Estate Inheritance?

The federal government does not impose an inheritance tax. However, it does impose an estate tax—but only on estates valued above a certain threshold.

As of 2025, the federal estate tax exemption is $13.61 million per individual. This means if the total estate value, including all property, assets, and accounts, is below this amount, no federal estate tax will be due. If the estate exceeds this threshold, taxes are paid out of the estate before the property is transferred to you.

This rarely applies to most individual heirs, but if your loved one had significant assets, it’s worth consulting an estate attorney or CPA.

2. Real Estate Inheritance Tax at the State Level

Here’s where it gets more complicated. Five states currently impose inheritance tax:

• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

Whether or not you owe inheritance tax depends on your relationship to the deceased. In many of these states:

• Spouses are exempt.
• Children and grandchildren may also be exempt or taxed at a lower rate.
• More distant relatives or non-relatives could face rates ranging from 5% to 18%.

For example, if you inherit a house in Pennsylvania from an aunt, you could owe up to 15% of the home’s value in inheritance tax, depending on your relationship and the home’s appraisal value.

3. Understanding Capital Gains Tax on Inherited Real Estate

Capital gains tax doesn't kick in upon inheritance—it’s only triggered when the inherited property is sold.

The good news for heirs is the IRS offers a step-up in basis rule. Instead of using the original purchase price of the property (say, $100,000 in 1980), your “cost basis” is stepped up to the fair market value at the date of death (for example, $450,000 in 2025). So, if you sell the home for $460,000 shortly after inheriting it, you’d only be taxed on the $10,000 gain, not the full $360,000.

This rule often reduces or eliminates capital gains tax for heirs who sell the property relatively quickly.

4. What Happens If You Keep the Property?

If you decide to keep the inherited home, taxes might still come into play down the line:

• Property Taxes: You’ll now be responsible for ongoing local property taxes. Some states allow a reassessment or property tax exemption for inherited homes, especially for spouses or children.
  
  
• Capital Improvements: If you later sell the house, any improvements you make can also adjust your cost basis.
  
  
• Rental Income: If you rent out the inherited property, that income is taxable and should be reported on your tax return.
  
  

5. Tips for Navigating Real Estate Inheritance Tax

If you’ve recently inherited property, here are a few steps to help you manage the situation wisely:

• Get a professional appraisal of the property’s fair market value at the date of death.
  
  
• Check the state inheritance tax laws based on where the deceased lived and where the property is located.
  
  
• Speak with a tax advisor or estate attorney to help file any necessary forms and reduce potential liabilities.
  
  
• Decide whether to keep, sell, or rent the property—each decision has different tax implications.
  
  
• Review ownership and title documents to ensure a clean transfer of property.

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Inheriting real estate during a time of grief is never easy. While taxes are rarely the first thing on your mind after losing someone, they are a necessary part of settling an estate. Fortunately, most heirs won’t owe federal estate taxes, and capital gains tax can be significantly reduced thanks to the step-up in basis. Still, state inheritance tax and future property tax responsibilities can impact your financial picture in ways you might not expect.

For additional estate settlement support, check out the Elayne After-Tax Inheritance Calculator.  

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