Estate Planning When You Inherit Property

When you inherit appreciated property, including a home, brokerage account, or business interest, the cost basis is generally stepped up to the fair market value on the date of death under 26 U.S.C. § 1014. Sell the next day and the capital gain may be near zero. Hold for ten years and you are taxed only on appreciation since the date of death. Document the date-of-death value with a written appraisal (for real estate) or brokerage statement (for securities) before you do anything else.

Arizona has no state estate or inheritance tax (per the Arizona Department of Revenue), so the step-up generally translates directly into federal-only savings. Miss the appraisal and the IRS may default to the decedent's original basis years later. That is a costly correction.

How an Arizona home transfers to you depends on how it was titled. If it was held in a revocable living trust, the successor trustee can sign a deed transferring it to you without probate. If it was titled with a recorded beneficiary deed (A.R.S. § 33-405), you record the death certificate and an affidavit; no probate required. If it was titled in the decedent's individual name only and the equity exceeds Arizona's real-estate small estate threshold ($100,000 net of liens, A.R.S. § 14-3971), you will likely need formal or informal probate to clear title.

Once you take title, decide quickly: keep, rent, or sell. Each has different tax and insurance consequences. If you keep it as a primary residence, retitle into your own trust and update homeowner's insurance immediately; the decedent's policy may be void at death. If you convert it to a rental, the Arizona property-tax classification shifts from Class 3 (owner-occupied, 10% assessment ratio) to Class 4 (rental, 15% assessment ratio), which can roughly increase the property tax bill by half. Run that math before you put a tenant in.

Inherited IRAs and 401(k)s do not get a step-up in basis. Distributions are still taxed as ordinary income to you. Under the SECURE Act, most non-spouse beneficiaries must empty the inherited account within 10 years of the original owner's death (per IRS guidance). Final IRS rules also require annual minimum distributions during those 10 years if the original owner had reached their required beginning date.

Spouses have more options: spousal rollover, treat-as-own, or remain a beneficiary. Minor children of the decedent and beneficiaries who are disabled, chronically ill, or not more than 10 years younger than the decedent can stretch distributions further. Run the numbers with a CPA before taking any distribution. Once a check is cut, the tax election is locked.

Arizona allows a qualified disclaimer (A.R.S. § 14-10001 et seq.) within nine months of the decedent's death (the federal deadline under 26 U.S.C. § 2518). A disclaimer is a written, irrevocable refusal. The asset then passes as if you had predeceased. Disclaimers are useful when an inheritance would push you into a higher tax bracket, complicate Medicaid planning, expose assets to a creditor, or when a contingent beneficiary such as a child or charity would benefit more.

However you take the asset, update your own estate plan within 90 days. Add the new property to your trust schedule, retitle accounts, and re-evaluate beneficiaries. Inheritances often push families across thresholds, including federal estate exemption, Medicaid look-back, and college financial aid, that change what their plan should look like.

In practice: imagine an adult child in Tucson who inherits her mother's Phoenix home, bought decades ago for $90,000 and now worth $450,000. With a written date-of-death appraisal in hand, she sells the next year for $460,000 and owes capital gains only on the $10,000 gain since death. Without that appraisal, the IRS could later default to the original $90,000 basis and treat the entire $370,000 of appreciation as taxable.