4.7 Interest/Dividends/Other Types of Income: Gifts & Inheritances
Are gifts, bequests, or inheritances taxable?
Generally, property you receive as a gift, bequest, or inheritance is not
included in your income. However, if property you receive this way later produces
income such as interest, dividends, or rentals, that income is taxable to
you. For additional information, refer to Publication 17, Your Federal
Income Tax, Chapter 13. If you inherit an Individual Retirement Arrangement
(IRA) or proceeds from a retirement (pension) plan, special rules apply. Refer
to Publication 590, Individual Retirement Arrangements (IRAs),
or Publication 575, Pension and Annuity Income, for further information.
For additional information on this subject see Gifts.
References:
Is the money received from the sale of inherited property considered
taxable income?
To determine if the sale of inherited property is taxable, you must first
determine your basis in the property. The basis of inherited property is generally
one of the following:
(1) The fair market value (FMV) of the property on the date of the decedent's
death.
(2) The FMV of the property on the alternate valuation date if the executor
of the estate chooses to use alternate valuation. See Form 706 (PDF), United States Estate (and Generation-Skipping Transfer) Tax
Return.
(3) The special use valuation for estate tax purposes of qualified real
property used for farming purposes or in a trade or business other than farming.
However, if an interest in such property is disposed of or ceases to be used
in a qualified use during the 10 year period following the decedent's death,
additional estate tax is imposed. If the qualified heir elects to pay interest
on the additional estate tax, the adjusted basis of the property will be deemed
to have been increased, immediately before disposition, by an amount equal
to the excess of its fair market value on the date of the decedent's death
over its special use value. See Form 706 (PDF), U.S.
Estate (and Generation-Skipping Transfer) Tax Return and section 2032A
of Internal Revenue Code.
(4) If an election is made to exclude a portion of the value of land from
a decedent's gross estate section 2031 (c) (regarding the transfer of qualified
conservation easement), the decedent's adjusted basis in the land to the extent
the value of the land was excluded from the decedent's gross estate under
2031(c) by reason of the transfer of a qualified conservation easement plus
the fair market value of the land to the extent the value of the land was
included in the gross estate. For more information on qualified conservation
easement see the
Instructions for Form 706, U. S. Estate
(and Generation-Skipping Transfer) Tax Returnand section 2031(c) of the
Internal Revenue Code.
If you or your spouse gave the property to the descendent within one year
of their death, see Publication 551, Basis of Assets.
Report the sale on Form 1040, Schedule D (PDF), Capital
Gain and Losses. If you sell the property for more than your basis, you
have a taxable gain. For information on how to report the sale on Schedule
D, please see Publication 550, Investment Income and Expenses.
References:
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