In most cases, an inheritance is not taxable to you, but there are exceptions
At some point, you may inherit money or property that, in most cases, is not taxable to you. Life insurance proceeds are included in the deceased person’s estate, but are not taxable to the beneficiaries. Bank accounts and other income-producing assets such as stocks are not taxable to you when received, but the income these assets generate is taxable to you. If you are not sure if something was included in the decedent’s taxable income, you should check with the administrator or attorney handling the estate to advise you what portion of the income earned on these assets should be included on your personal return. You may get a Schedule K-1 for items that are allocated to you from the estate. Be sure to inform your tax preparer of any income you receive from an inheritance because, although in most cases there is no income tax liability, there are some exceptions. If you inherit a pension or IRA, you must pay tax on the amounts you receive just as the decedent would have been required to do during his life. A person who inherits an IRA can roll over these types of funds tax free into a plan in her name and treat it as her own. If you inherit a pension plan or IRA, contact your tax professional as soon as possible to discuss your options regarding the withdrawal of the money. Savings bonds can also be treated in several different ways, so be sure to provide any information from the estate to your tax preparer.
Have you ever heard of the term “stepped-up basis”? This means that your investment in inherited property is considered to be the value as of the date of death. When you sell property that you inherit, you only pay tax on the difference between the amount you sold it for and the value of the property as of the date of death (or six months thereafter, as determined by the administrator of the estate). There can even be a loss if you sell the property for less than this date-of-death value. Your tax professional will need to know the date-of-death value to determine the gain or loss. The administrator or the attorney should be able to provide you with the value of the property so that you can correctly report the sale.
Related IRS Publications: 559