Inheritance Tax & Capital Gains Rules by State

• Inheritance tax is paid by the heirs who receive property. Only a few states (like Pennsylvania, New Jersey, and Kentucky) still impose it.
• Estate tax is paid by the estate itself before distribution. States like Connecticut, Massachusetts, Minnesota, New York, and Illinois still levy an estate tax above certain thresholds.

Usually not right away. Federal law provides a “stepped-up basis”—the property’s value is reset to its fair market value at the date of the decedent’s death. If you sell the home soon after inheriting, there may be little or no capital gains tax.

If the property appreciates after you inherit it, you may owe capital gains tax on the difference between the stepped-up basis and the later sale price.

As of 2025:

• Inheritance tax states: Kentucky, New Jersey, Pennsylvania (rates vary by heir relationship).
• Estate tax states (with exemptions): Connecticut, Massachusetts, Minnesota, New York, Illinois.

Not usually. The property must pass through probate unless it was held in trust or jointly with survivorship rights. However, investors like Aldric Property Solutions often buy probate properties with court approval, helping heirs get liquidity faster.

In the U.S., inheriting assets does not trigger a federal inheritance tax, but certain circumstances can result in capital gains and estate taxes. The primary tax provision affecting inherited assets is the “stepped-up basis,” which resets an asset’s value for capital gains calculations.

Example of stepped-up basis

• A parent bought a house for $50,000 many years ago.
• At the time of their death, the house is appraised at $800,000. Your cost basis is reset to $800,000.
• If you sell the house immediately for $800,000, you have no taxable capital gain.
• If you sell the house for $900,000 a year later, your taxable capital gain is the $100,000 profit since inheriting it ($900,000 − $800,000).