Inheriting Assets: What Taxpayers Need to Know

Inheriting assets can be both a financial opportunity and a tax challenge. Many beneficiaries assume inheritances are automatically taxable or, conversely, completely tax-free. In reality, the tax treatment depends on what you inherit, how it’s structured, and what you do with it afterward.

Understanding the rules can help you avoid costly mistakes and preserve the value of what you receive.

Is an Inheritance Taxable?

In most cases, receiving an inheritance is not taxable income for federal or California purposes. California does not impose an inheritance tax.

However, inheriting assets often creates future tax consequences, particularly when assets are sold or generate income.

The Step-Up in Basis Rule

One of the most important benefits of inheriting assets is the step-up in basis:

• Assets are generally revalued to their fair market value as of the decedent’s date of death

• This can significantly reduce or eliminate capital gains tax when assets are later sold

This rule commonly applies to real estate, stocks, and other investments.

Inheriting Real Estate

When you inherit property:

• The stepped-up basis can eliminate years of built-in appreciation

• Capital gains tax may be minimal if the property is sold soon after inheritance

• Rental income is taxable once you begin renting the property

California property tax rules may also apply, depending on how the property is used or transferred.

Inheriting Investment Accounts

Inherited brokerage accounts benefit from a stepped-up basis, but:

• Dividends and interest are taxable going forward

• Selling assets still requires accurate reporting

• Poor recordkeeping can lead to overpaying tax

Inherited retirement accounts follow very different rules.

Inheriting Retirement Accounts

IRAs and other retirement accounts are taxable to the beneficiary when distributions are taken. Key considerations include:

• Required distribution timelines

• Ordinary income taxation on withdrawals

• Potential penalties for missed distributions

Recent law changes have made inherited retirement accounts more complex.

Common Mistakes Beneficiaries Make

Problems often arise when beneficiaries:

• Assume all inherited assets are tax-free

• Sell assets without understanding basis rules

• Miss required distributions

• Ignore California tax implications

• Fail to coordinate estate and personal tax planning

These errors can permanently increase tax exposure.

Why Timing and Planning Matter

Decisions made soon after inheritance can affect:

• Capital gains taxes

• Income tax brackets

• Long-term investment strategy

• Estate planning for your own heirs

A thoughtful approach preserves flexibility and value.

How All California Accountancy Can Help

At All California Accountancy, we help clients:

• Understand the tax treatment of inherited assets

• Track and document stepped-up basis

• Plan asset sales tax-efficiently

• Navigate inherited retirement account rules

• Coordinate federal and California tax strategies

Inheriting assets is more than a one-time event — it’s a tax planning opportunity.

Disclaimer

This article is for educational purposes only and does not constitute legal, tax, or accounting advice. Consult a qualified CPA regarding your specific situation.

IRS Circular 230 Disclosure: Any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties or promoting, marketing, or recommending any transaction or matter addressed.