Inheriting a home or share of a property also means doing paperwork and understanding taxes. You might be looking at a stack of tax forms and wondering whether the IRS is about to take a chunk of the proceeds.

Most people who inherit real estate don’t know how much they will owe in taxes and when. There are also a couple of situations, such as trusts, alternate valuations, and family agreements, that can confuse many beneficiaries.

What is the Difference Between Estate and Inheritance Tax

Estate tax is applied to the estate before anything is ever distributed to the beneficiaries. This type of federal tax is applicable only if the value of the estate exceeds $15 million per person. Most families never come close to that number, so the federal estate tax simply isn't a concern for the average heir.

Inherited tax is paid by those who inherit the money or real estate. There are only 5 states imposing an inheritance tax, including Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland is the only state where both estate and inheritance taxes are collected.

So for most people federal taxes are not a reason for concern. The only question is about the inheritance tax.

A Quick Word on Capital Gains

You've probably already read about this elsewhere, so we'll keep it short: when you inherit property, your tax basis resets to the fair market value on the date of death. This is called a "step-up in basis." It means you only owe capital gains tax on appreciation that happens after you inherit the house, not on decades of appreciation the original owner enjoyed.

What is The Alternate Valuation Date

Here's one that rarely gets discussed. The executor of an estate can elect to value all estate assets six months after the date of death if property values have dropped in that window. This is called the alternate valuation date.

This choice is applied to the entire estate and not any single asset. It's also only useful when the estate is large enough to owe federal estate tax and the total value has genuinely declined. If it lowers both the estate's value and the tax owed, the executor can file for it.

Do You Pay Taxes on a Property Held in Trust?

This is one of the most common questions we get, and the honest answer is, "It depends on the type of trust."

If the property was in a revocable trust, that means the owner had the control over the assets. Once they pass away, the property still gets the step-up in basis like a direct inheritance.

The rules change when there is an irrevocable trust involved. The trust is treated as a separate legal entity and all the income generated from the property inside the trust may be taxed at the trust level if the trust retained that income. Beneficiaries may not always benefit from the step-up in basis when inheriting property through an irrevocable living trust.

Let’s say you are in Maryland and one of your parents leaves you a house in a revocable trust. In that specific scenario, you won’t pay inheritance tax. You will be exempt because of your close relationship to the deceased person. However, if your aunt leaves you a house held in a trust, you may have to pay 10% inheritance tax in Maryland. Since laws can change frequently, it’s important to consult a legal resource for updated information.

Can You Buy Your Parents' House to Avoid Inheritance Tax?

Buying your parent’s house to avoid taxes in the future is not a realistic shortcut. This strategy can end up creating more problems down the road.

The #1 issue is that you cannot buy the house for less than fair market value. Otherwise, the IRS treats the difference as a gift, which counts against the lifetime gift and estate tax exemption and requires a gift tax return if it exceeds $19,000 in a given year. You also lose the step-up in basis entirely, because you didn't inherit the property; you bought it. Your basis becomes whatever you paid, which usually means a bigger capital gains bill down the road. On top of that, if your parent ever needs Medicaid, a below-market sale can trigger a penalty period during the program's five-year lookback. Buying the house doesn't sidestep taxes; it just trades one tax problem for a different one.

Is There a Time Limit on Selling an Inherited Property?

There's no IRS deadline forcing you to sell within a certain window. But waiting isn't free, either. The step-up in basis is locked in at the date of death, so every month you hold the property, any new appreciation becomes taxable gain when you eventually sell. Meanwhile, property taxes, insurance, and maintenance keep accruing whether you're ready to deal with the house or not.

The Simplest Way to Avoid Ongoing Tax Headaches

Most beneficiaries inherit a house when they don’t need it. They usually don’t have the time or patience to handle long maintenance, repairs, and the holding costs. That’s why many people choose to sell their inherited homes quickly for cash because it gives them the financial freedom and time to focus on other important aspects of life.