Life changes
Received an Inheritance? What Is and Is Not Taxable
Inheriting money is usually not income to you. What you do with inherited property, and whether it came from a retirement account, is where the tax shows up.
Reviewed by LaToya Clark-Thompson, FounderLast updated
The short version
Money or property you inherit is generally not taxable income on your federal return. South Carolina has no inheritance tax and no estate tax. The federal estate tax, when it applies at all, is paid by the estate before anything is distributed, and only very large estates owe it. What can be taxable is income the inheritance produces after you receive it, and certain kinds of assets that carry built-in income.
Inherited retirement accounts
An inherited traditional IRA or 401(k) is different from inherited cash. Withdrawals are taxable income to you, reported on Form 1099-R with a code showing a death distribution. There is no early-withdrawal penalty on inherited accounts, regardless of your age.
A surviving spouse has the most choices, including treating the account as their own. Most other beneficiaries must empty the account within a set period after the death, and if the original owner had already started required distributions, annual withdrawals may be required along the way. Some beneficiaries, such as minor children of the owner or people who are disabled or close in age to the owner, have other options. Taking it all at once can push you into a much higher bracket; spreading withdrawals usually costs less. Inherited Roth accounts are generally tax-free if the account was old enough.
Inherited homes, stocks and other property
Property you inherit usually takes a new tax basis equal to its fair market value on the date of death (this is the step-up in basis). If you sell an inherited house or stock soon after, the gain is usually small or nothing, and any gain is treated as long-term no matter how briefly you held it. Get a date-of-death appraisal for real estate and the date-of-death value for brokerage accounts; without it, figuring the gain later is hard.
Selling inherited real estate brings Form 1099-S, and selling inherited investments brings Form 1099-B. Both go on Form 8949 and Schedule D. Our selling a home and selling investments pages cover those returns in more detail.
Estate income, K-1s and what to bring
While an estate is being settled, the money it holds may earn interest, dividends or rent. The estate files its own return (Form 1041), and income passed out to beneficiaries is reported to you on Schedule K-1. That K-1 often arrives late, so ask the executor when to expect it before you file.
- Form 1099-R for any inherited retirement account withdrawals
- Schedule K-1 from the estate or trust
- Date-of-death values or appraisals for inherited property
- Closing statements or Forms 1099-S and 1099-B for anything you sold
- Letters from the executor or the account custodian about beneficiary options
Common mistakes, and when to get help
Common mistakes: reporting inherited cash as income, cashing out an inherited IRA in one year without seeing the tax, using the original owner’s purchase price as your basis, and filing before the estate’s K-1 arrives. Help is worth it whenever an inherited IRA, property sale or K-1 is involved. We prepare the return through tax preparation and can plan inherited IRA withdrawals with tax planning. If you are also the surviving spouse, see after a spouse passes away, and for broader planning, our estate tax planning article.
Frequently asked questions
Do I have to pay taxes on an inheritance in South Carolina?
Generally no. South Carolina has no inheritance tax and no estate tax, and federally an inheritance is not income to the person who receives it. Tax can come later: withdrawals from an inherited traditional IRA or 401(k) are taxable, and interest, dividends, rent or gains the inherited assets earn after you receive them are taxable to you.
Do I pay capital gains tax if I sell an inherited house?
Usually only on any increase in value after the date of death. Inherited property generally gets a basis equal to its fair market value when the owner died, so selling soon afterward often produces little or no gain. Any gain is treated as long-term. Keep a date-of-death appraisal and the closing statement, and report the sale on Form 8949 and Schedule D.
How is an inherited IRA taxed?
Withdrawals from an inherited traditional IRA are taxable income in the year you take them, with no early-withdrawal penalty. Most non-spouse beneficiaries must empty the account within a set period after the death, and some must also take yearly distributions. A surviving spouse can often treat it as their own. Planning the withdrawals over several years usually keeps the tax lower.
What is a Schedule K-1 from an estate?
It reports your share of income the estate or trust earned while it held the assets, such as interest, dividends or gains, and passed out to you. You include those amounts on your own return. Estates often file late in the season or on extension, so the K-1 may arrive after other forms. Wait for it, or plan to file on extension.
Not the question you had? The full tax FAQ covers more ground, and our client reviews say what the work is actually like.
Related pages
You sold investments or crypto
Forms 1099-B and 1099-DA, short vs long term, missing basis, losses and crypto.
Learn moreYour spouse passed away
The final joint return, surviving spouse status, inherited accounts and what to gather.
Learn moreYou retired
Pensions and IRAs on a 1099-R, required distributions, withholding and SC’s retirement deduction.
Learn moreYou sold a home
The main home exclusion, Form 1099-S, basis and improvements, and when a sale is taxed.
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