What Happens to Your Tax Responsibilities When You Inherit Assets?

Inheriting a family home, investment account, or other valuable asset can have a significant financial impact. While receiving an inheritance does not automatically mean you owe income tax, there may be important tax considerations depending on the type of asset, its value, and what you decide to do with it. 

Do you owe tax simply because you received an inheritance? What happens if you later sell inherited property or investments? Working with an experienced accounting firm on Long Island can help you understand how inherited assets may affect your tax situation. 

Do You Pay Tax When You Inherit Assets? 

In most cases, an inheritance itself is not considered taxable income for federal income tax purposes. However, other taxes may apply to the estate or to income and gains generated by the inherited assets. 

Understanding Estate Tax and Inheritance Tax 

Estate tax is generally imposed on the estate of the deceased before assets are distributed to beneficiaries. Inheritance tax, by comparison, may be imposed on the person receiving the inheritance. 

New York has an estate tax, but it does not currently impose a separate state inheritance tax. Depending on the size of the estate and other circumstances, federal estate tax rules may also need to be considered. 

What Happens When You Sell Inherited Assets? 

Understanding the Cost Basis of Inherited Property 

One of the most important tax considerations when selling inherited property is its cost basis. 

For many inherited assets, the tax basis is generally adjusted to the asset's fair market value as of the deceased owner's date of death. This is often referred to as a "step-up in basis." 

The adjusted basis is important because it is used to determine whether you have a taxable gain or loss when the asset is eventually sold. 

For this reason, it is helpful to keep documentation such as estate records, property appraisals, investment statements, and other valuation information. 

Capital Gains Tax May Apply 

If you sell an inherited home, stocks, investments, or other appreciated assets, you may owe capital gains tax. 

Generally, the taxable gain is based on the difference between the asset's adjusted tax basis and the amount you receive when you sell it, after taking certain allowable expenses into account. 

The Date-of-Death Value Matters 

The fair market value of an inherited asset at the time of the previous owner's death can have a major effect on the amount of taxable gain when the asset is sold. 

For example, if an inherited property is worth $600,000 on the date of death and is later sold for $625,000, the taxable gain may be based primarily on the increase in value after inheritance rather than the property's original purchase price. 

The actual calculation can depend on the circumstances, so accurate valuation records are important. 

Selling Expenses Can Affect Your Taxable Gain 

Certain expenses associated with selling inherited property may reduce the amount of taxable gain. 

If an inherited asset is sold for less than its tax basis, there may be a capital loss. Whether that loss is deductible can depend on the type of asset, how it was used, and other tax rules. 

Holding Period Rules Are Different for Inherited Assets 

Inherited property generally receives special treatment under federal capital gains rules. In many cases, inherited assets are treated as long-term capital assets regardless of how long the beneficiary actually owned them. 

This means an inherited asset may qualify for long-term capital gains treatment even if it is sold relatively soon after it is received. 

How CPAs Can Help With Inherited Assets 

Calculate Capital Gains 

A CPA can help determine the taxable gain or loss when inherited property or investments are sold. This may involve reviewing the asset's basis, sale price, selling expenses, and supporting documentation. 

Identify Tax-Planning Opportunities 

An accountant can review your overall financial situation and identify potential deductions, adjustments, and planning strategies that may help reduce unnecessary tax exposure. 

Prepare and File Tax Returns 

Inherited assets can affect both federal and state tax filings. A CPA can help ensure that gains, losses, income, and other relevant information are reported properly. 

Get Help From an Accounting Firm on Long Island 

Inherited assets can create tax questions that are not always straightforward, particularly when real estate, investment accounts, or high-value assets are involved. 

Tepper & Tepper helps individuals and families understand their tax responsibilities and prepare for important financial decisions. Our team can assist with tax preparation, planning, and the tax implications associated with inherited assets. 

If you have recently received an inheritance or are considering selling inherited property, contact Tepper & Tepper to speak with an experienced accounting firm on Long Island.