Inheritance Trust Tax: Will You Have to Pay?

Let’s clear up a common myth: receiving an inheritance doesn’t automatically mean you’ll be writing a huge check to the IRS. Many people worry unnecessarily because the rules around taxes can be so confusing. The good news, especially for those of us in California, is that the reality of inheritance trust tax is often much more favorable than you might think. This article will break down exactly what you need to know. We’ll explain the crucial difference between an estate tax and an inheritance tax, highlight California’s tax-friendly laws, and show you how provisions like the “stepped-up basis” can save you a significant amount of money.

Key Takeaways

• Focus on Taxable Income, Not the Core Inheritance: The original assets you inherit from a trust (the principal) are generally not taxed. Your tax responsibility comes from any income the trust generates and distributes to you, such as stock dividends or rental income.
• Use the “Stepped-Up Basis” to Reduce Capital Gains Tax: When you inherit an asset like a home, its cost basis is reset to its market value at the time of the owner’s death. This powerful tax rule can significantly lower or even eliminate your capital gains tax bill if you decide to sell the asset.
• Take Advantage of California’s Favorable Laws with Expert Guidance: California has no state inheritance or estate tax, which is a major financial benefit. To handle the complexities of trust administration correctly, partner with a trust attorney and tax advisor to create a clear plan and protect your inheritance.

What Is an Inheritance Trust and How Does It Work?

If you’ve learned you’re the beneficiary of a trust, you might be picturing a dramatic reading of a will in a lawyer’s office. The reality is usually much quieter, but it can feel just as confusing. Let’s clear things up. A trust is simply a legal arrangement for holding assets, like property or money. Think of it as a container created to protect and manage assets on behalf of someone else.

There are three key people involved:

• The Grantor: This is the person who created the trust and put their assets into it.
• The Trustee: This is the person or institution responsible for managing the assets according to the rules the grantor set.
• The Beneficiary: That’s you! You’re the person who will receive the assets or benefits from the trust.

The grantor sets up the trust as part of their overall estate plan to ensure their assets are handled exactly as they wish after they’re gone. The trustee then follows those instructions, managing the trust and eventually distributing the assets to you. This process helps avoid the often lengthy and public court process known as probate, making it a smoother transition for everyone involved.

Exploring Different Types of Trusts

Not all trusts are the same, and the type of trust you’re inheriting from will affect how things work. The two most common types are revocable and irrevocable trusts. A revocable trust is flexible; the grantor can change or even cancel it at any time while they are alive. Once the grantor passes away, it typically becomes permanent.

An irrevocable trust, on the other hand, can’t be changed once it’s created. It’s like setting the plan in stone. This is often done for tax planning purposes, as the assets placed inside an irrevocable trust are usually no longer considered part of the grantor’s taxable estate. As a beneficiary, the main difference you’ll notice is that the rules for an irrevocable trust are fixed from the start.

How Trusts Pay Out to Beneficiaries

When a trust distributes assets to you, it’s important to know where the money is coming from. You might receive the original asset itself—like a house or a stock portfolio—which is called the “principal.” You generally don’t pay taxes on inheriting the principal. However, a trust can also earn money from its assets, such as from stock dividends or rent from a property. This is called “income.”

If the trust pays that income out to you, you will likely have to pay income tax on it. The trustee will send you a tax form called a Schedule K-1, which details the income you received. This form tells you exactly what you need to report on your personal tax return.

Will You Owe Taxes on a Trust Inheritance?

The word “taxes” can make anyone’s shoulders tense up, especially when you’re already managing the details of an inheritance. The good news is that receiving assets from a trust doesn’t automatically trigger a huge tax bill. In many cases, you may not owe any tax at all. The key is to understand what part of your inheritance is considered taxable and what isn’t. Let’s break down the basics so you can feel more confident about what to expect.

Principal vs. Income: What’s Taxable?

Think of a trust like a fruit tree. The tree itself is the “principal”—the original assets and money put into the trust. The fruit it produces each year is the “income,” like interest, dividends, or rent from a property. When you receive a distribution from the trust, you generally don’t pay taxes on the principal. That’s because those assets are presumed to have already been taxed when they were first earned.

However, if the trust generates income and that income is passed on to you, you will likely owe income tax on it. You’ll receive a tax form called a Schedule K-1 from the trustee, which tells you exactly how much taxable income you received from the trust that year.

When You Owe Taxes (and When You Don’t)

Most people who inherit from a trust won’t have to worry about federal estate taxes. These taxes only apply to very large estates, and the exemption amount is quite high. While some states have their own estate or inheritance taxes, California is not one of them. The main tax you’ll encounter is the income tax on earnings generated by the trust’s assets, as we just covered. The process of trust administration involves sorting through these details, ensuring that distributions are handled correctly and beneficiaries are informed of any tax responsibilities. So, for the most part, you can expect to receive the core assets of your inheritance tax-free.

Clearing Up Common Tax Myths

It’s easy to get confused by the terms “estate tax” and “inheritance tax,” but they aren’t the same thing. The United States does not have a federal inheritance tax. An inheritance tax is paid by the person who receives the money or property. A federal estate tax, on the other hand, is paid by the deceased person’s estate before any assets are distributed to the heirs. It’s a tax on the total value of everything the person owned. Since the estate handles this tax, beneficiaries typically don’t have to worry about it directly. Understanding this difference can clear up a lot of confusion and help you focus on what actually applies to your situation.

How the “Stepped-Up Basis” Can Save You Money on Taxes

One of the most significant financial benefits of inheriting assets like a home or a stock portfolio is a tax rule known as the “stepped-up basis.” It sounds technical, but the concept is a straightforward and powerful tool that can save you a substantial amount of money in capital gains taxes. Essentially, when you inherit property, its value for tax purposes is reset—or “stepped up”—to the fair market value on the date the original owner passed away.

This tax provision is a cornerstone of effective estate planning because it allows wealth to be transferred more efficiently across generations. Instead of being burdened with the tax consequences of an asset’s appreciation over many years, you get a fresh start. If you decide to sell the inherited property shortly after receiving it, you could end up paying very little—or even nothing—in capital gains tax. Understanding how this works is key to making smart decisions about the assets you’ve received.

How to Calculate Your New Cost Basis

Your “cost basis” is the original value of an asset for tax purposes. For the stepped-up basis, this value is reset. To calculate your new cost basis, you need to determine the fair market value of the asset on the date of the grantor’s death. For stocks and bonds, this is relatively easy to find using historical market data. For real estate, it typically requires a formal appraisal.

Let’s use an example: Your parents bought their California home for $300,000 decades ago. When you inherit it, the house is appraised at $1.5 million. Your new, “stepped-up” cost basis is $1.5 million, not the original $300,000. This appraisal is a critical step in the trust administration process, as it officially documents the new value for the IRS.

Understanding Your Capital Gains Tax Savings

The real magic of the stepped-up basis happens when you decide to sell an inherited asset. You only pay capital gains tax on the difference between the sale price and your cost basis. Using the previous example, your basis in the home is $1.5 million. If you sell it a few months later for $1.55 million, you only owe taxes on the $50,000 gain.

Without the step-up, your basis would have been the original $300,000 purchase price. A sale at $1.55 million would have resulted in a taxable gain of $1.25 million—a massive difference that could lead to a six-figure tax bill. As an added benefit, the IRS automatically considers inherited property to be held “long-term,” which means any gains are typically taxed at more favorable long-term capital gains rates.

Exceptions to the Stepped-Up Basis Rule

While the stepped-up basis is a fantastic benefit, it doesn’t apply in every situation. It’s important to know that this rule generally applies to assets that pass through an estate or a revocable living trust after death. However, some types of irrevocable trusts may not qualify for the step-up, depending on how they were structured.

Another key exception involves assets that were given as gifts during the owner’s lifetime. If your parents had gifted you their home before they passed away, you would have inherited their original $300,000 cost basis, not the stepped-up value. This is a crucial distinction that highlights the importance of thoughtful estate planning. The specific language in the trust document matters, so it’s always wise to review it with a professional to confirm how your inheritance will be treated.

Do You Pay Federal or State Inheritance Tax on a Trust?

When you hear the word “inheritance,” the word “tax” often follows close behind, causing a bit of anxiety. It’s a common concern, but let’s clear the air. The good news is that inheritances from a trust generally aren’t subject to a federal inheritance tax, mainly because a federal inheritance tax doesn’t exist.

However, that doesn’t mean your inheritance is completely free from any tax obligations. Depending on the specifics of the trust and where you live, other taxes could come into play. These might include a federal estate tax, state-level taxes, or even income tax on earnings the trust generates. Understanding the difference between these taxes is the first step to feeling confident about your inheritance.

Estate Tax vs. Inheritance Tax: What’s the Difference?

People often use the terms “estate tax” and “inheritance tax” interchangeably, but they are two very different things. An inheritance tax is a tax paid by you, the beneficiary, on the money or property you receive from someone who has passed away. The responsibility for paying falls on the person who inherits the assets.

On the other hand, a federal estate tax is paid by the deceased person’s estate before any assets are distributed to the heirs. Think of it as a tax on the total value of everything the person owned at their death. The estate settles this bill, and only then is the remaining property passed on to you. Most estates aren’t large enough to trigger this tax, but it’s an important distinction to know.

Good News for Californians: Our Inheritance Tax Rules

If you live in California, you can breathe a sigh of relief. California is one of the majority of states that does not have its own inheritance tax or estate tax. This means that as a beneficiary in California, you won’t have to send a portion of your inherited assets to the state government simply for receiving them.

On top of that, you generally don’t have to pay federal income tax on money or property you inherit. According to the IRS, an inheritance isn’t considered taxable income for the recipient. So, whether you inherit a house, a stock portfolio, or cash from a trust, you typically won’t need to report it as income on your federal tax return. This simplifies things quite a bit for California residents.

Which States Have Inheritance or Estate Taxes?

While California doesn’t have these taxes, it’s helpful to know which states do, especially if you or other beneficiaries live elsewhere or if the trust holds property in another state. Only a handful of states currently impose an inheritance tax on beneficiaries. As of now, these states are Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

A different group of states has its own estate tax, which is levied on the deceased’s estate. These include Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Notice that Maryland is the only state that has both an inheritance tax and an estate tax. Knowing this can help you prepare if your family’s estate plan involves assets or relatives in these locations.

How Are Different Trust Payouts Taxed?

When you receive money from a trust, the IRS wants to know where it came from. Was it part of the original assets put into the trust, or was it income the trust earned later? This distinction is key because it determines how—and if—your payout gets taxed. Think of it like a savings account: you don’t pay taxes on the initial deposit (the principal), but you do pay taxes on the interest it earns (the income). Understanding the type of payout you’re receiving is the first step to figuring out what you might owe.

Taxes on Income Payouts

If a trust holds assets that generate their own money—like a rental property bringing in rent or stocks paying dividends—that money is considered trust income. When the trust pays that income out to you, it becomes your taxable income for the year. You’ll receive a tax form called a Schedule K-1 from the trustee, which spells out exactly how much income you need to report on your personal tax return. It’s a straightforward process, but it’s important to remember that this type of distribution is treated differently than receiving a piece of the trust’s original principal.

Taxes on Capital Gains Payouts

This is where things get interesting, especially if you inherit assets like real estate or stocks. Thanks to a rule called the “stepped-up basis,” the asset’s value is adjusted to its fair market value at the time the original owner passed away. If you decide to sell that asset shortly after inheriting it, your capital gains—the profit from the sale—could be very small or even zero. This is a significant tax advantage that can save you a lot of money, making the trust administration process much smoother when it comes to liquidating assets.

Trust vs. Individual Tax Rates: A Quick Comparison

Here’s a helpful tip: it’s often better for a trust to distribute its income to beneficiaries rather than hold onto it. Why? Because trusts face much steeper income tax rates than individuals do. A trust can hit the highest tax bracket with a relatively small amount of accumulated income. By distributing the income, the tax responsibility shifts to you, the beneficiary. You’ll likely pay at a lower individual rate than the trust would have, which means more of the inheritance stays in the family instead of going to the IRS.

Selling Inherited Assets? Here’s What to Expect on Tax Day

Receiving assets like a family home or a stock portfolio from a trust is a significant event. But if you decide to sell those assets, you’ll need to think about taxes. The good news is that the rules for inherited property often work in your favor, but understanding them is key to avoiding any surprises when you file your tax return. Let’s walk through what you need to know about capital gains, holding periods, and the timing of your sale.

How to Calculate Capital Gains

When you sell an asset for a profit, that profit is typically considered a “capital gain” and is subject to tax. For inherited assets, however, the calculation is a little different. Instead of using the original purchase price, your cost basis is “stepped up” to the asset’s fair market value on the date the person who left it to you passed away.

This is a huge benefit. For example, if your parents bought a home for $100,000 and it was worth $1 million when you inherited it, your basis is $1 million. If you sell it for $1.05 million, you only owe capital gains tax on the $50,000 profit, not the entire $950,000 increase in value. Selling soon after inheriting often means there’s very little, if any, profit to tax.

Does Your Holding Period Matter?

Yes, and in the best way possible. The IRS has different tax rates for short-term and long-term capital gains. Short-term gains (from assets held for one year or less) are taxed at your regular income tax rate, which can be quite high. Long-term gains have much lower, more favorable tax rates.

Here’s the great part: inherited property is automatically considered long-term, regardless of how long you actually hold it. This means you could sell an inherited stock a week after receiving it and still qualify for the lower long-term capital gains tax rate. This rule simplifies things and provides a significant tax advantage, allowing you to make decisions without worrying about a one-year holding clock.

Selling Now vs. Later: The Tax Impact

Deciding when to sell an inherited asset often comes down to your personal financial goals and the tax implications. Thanks to the stepped-up basis, selling shortly after you inherit usually results in minimal capital gains tax, since the sale price will likely be very close to the asset’s value at the time of death.

If you choose to hold onto the asset, any appreciation in value from the date of death onward will be a capital gain when you eventually sell. For instance, if that inherited $1 million home grows in value to $1.2 million over a few years, you’ll owe capital gains tax on the $200,000 profit. This process is a key part of the trust administration journey, and weighing the potential for growth against the future tax bill is a crucial step.

How to Report Your Trust Inheritance on Your Tax Return

When tax season rolls around, the last thing you want is a surprise. Reporting your trust inheritance doesn’t have to be a headache. It’s mostly about knowing what paperwork to expect and keeping your records organized. With the right information, you can handle your tax reporting with confidence and make sure you’re filing everything correctly. Let’s walk through the key documents and deadlines you’ll need to know.

Decoding the Schedule K-1 Form

Think of the Schedule K-1 as a summary slip from the trust, sent to you by the trustee. It’s the most important document you’ll receive for tax purposes. This form breaks down your specific share of the trust’s income, deductions, and credits for the year. You won’t report the entire value of the assets you inherited, but you will report any income generated by those assets that was distributed to you.

For example, if you inherited stocks held in the trust, the dividends they earned and paid out to you are taxable income. The Schedule K-1 (Form 1041) tells you the exact amounts to report on your personal tax return.

Essential Records You Need to Keep

Good record-keeping will make your life so much easier, both now and in the future. Start a folder—digital or physical—for all documents related to your inheritance. This is especially important if you plan to sell an inherited asset like a house or stock portfolio down the road.

Here’s what you need to hang onto:

• All Schedule K-1 forms you receive from the trust.
• A copy of the trust’s tax return, Form 1041, if the trustee provides it.
• Statements or letters from the trustee detailing any distributions you received.
• Documentation of the fair market value of assets on the date of the original owner’s passing. This establishes your “stepped-up basis” and is crucial for calculating capital gains taxes later.

Having these important documents organized will help you or your tax preparer file accurately.

Don’t Miss These Filing Deadlines

Tax deadlines are firm, so it’s important to have them on your calendar. Typically, you’ll report any income from the trust on your personal tax return, which is due on Tax Day in April. If you’re feeling overwhelmed or waiting on documents from the trustee, don’t panic. You can file for an extension, which usually gives you an extra six months to get your paperwork in order.

Just remember, an extension gives you more time to file, not more time to pay. If you anticipate owing taxes on the trust income, you still need to estimate and pay that amount by the original deadline to avoid penalties. If you’re unsure how to proceed, managing the trust administration process with professional guidance can provide clarity and peace of mind.

Smart Strategies to Lower Your Inheritance Tax Bill

Receiving an inheritance is a significant life event, but it can come with tax questions. The good news is you aren’t powerless. With a bit of planning and communication with your trustee, you can use several effective strategies to manage the tax impact of your inheritance. These approaches can help ensure more of the assets stay with you and your family, honoring the intentions of the person who created the trust. Let’s walk through some of the most common and effective ways to handle your trust inheritance tax-efficiently.

Time Your Payouts for Maximum Savings

One of the biggest advantages of a trust is its flexibility. Instead of receiving a single, massive payout that could push you into a higher tax bracket for the year, you can often work with your trustee to time the distributions. A trustee might give out smaller amounts of income over several years, a strategy that can help keep beneficiaries in lower tax brackets. By planning your payouts, you can manage your annual income more effectively. This requires open communication with the person managing the trust, but it’s a conversation worth having to potentially save a significant amount on taxes over time.

Consider Charitable Giving

If you’re charitably inclined, your inheritance can be a powerful tool for giving back while also managing your tax liability. This is especially true if you inherit assets that have grown in value, like stocks or real estate. Instead of selling the asset and paying capital gains tax on the profit, you can donate it directly to a qualified charity. This approach often allows you to avoid paying taxes on those gains and you might even receive an income tax deduction for the donation. It’s a win-win: you support a cause you believe in and reduce your overall tax bill.

Spread Out Income to Reduce Taxes

Understanding who pays the tax—the trust or you—is key to saving money. Generally, if the trust earns income (like dividends or interest) and holds onto it, the trust itself pays the income tax. The catch is that trust tax rates are much higher and kick in at lower income levels than individual rates. It’s often more tax-efficient for the trust to distribute that income to you. When the trust gives the money to you, you pay the income tax at your personal rate, which is likely much lower. This prevents income from piling up inside the trust and being taxed at those higher, compressed rates.

When to Call a Tax Professional

While these tips can point you in the right direction, tax law is complex and every family’s situation is unique. This is not the time for guesswork. It’s incredibly important to talk to experts like estate planning attorneys and tax advisors who can provide personalized guidance. Getting expert advice from a firm that understands the nuances of California inheritance law ensures you’re making informed decisions and complying with all the rules. A professional can review the trust document, help you understand your responsibilities as a beneficiary, and create a clear plan for managing your inheritance, giving you peace of mind during a complicated time.

Revocable vs. Irrevocable Trusts: How They Impact Your Taxes

When you learn you’re the beneficiary of a trust, one of the first questions you might have is what kind of trust it is. The answer—revocable or irrevocable—has a major impact on your tax situation. Think of it this way: a revocable trust is flexible, while an irrevocable trust is set in stone. The person who created the trust, known as the grantor, makes this choice as part of their overall estate planning.

A revocable trust can be changed or even canceled by the grantor at any point while they’re alive. Because they maintain control, the trust’s assets are still considered part of their estate, and any income generated is reported on their personal tax return. For you as the beneficiary, this usually means no immediate tax consequences. However, once the grantor passes away, the trust typically becomes irrevocable, and that’s when the tax rules change for you.

An irrevocable trust, on the other hand, cannot be altered once it’s created. The assets are officially transferred out of the grantor’s estate. This move can be a smart way to reduce potential estate taxes down the line, which is a direct benefit to the beneficiaries. Understanding which type of trust you’re inheriting from is the first step in figuring out your financial and tax responsibilities.

Key Tax Differences for Beneficiaries

The main tax difference for you as a beneficiary comes down to how the trust’s assets and earnings are treated. With a revocable trust, the grantor handles all the taxes during their lifetime. Once it becomes irrevocable upon their death, the trust itself becomes a separate taxable entity.

For irrevocable trusts, it’s helpful to distinguish between the principal and the income. The principal is the original amount of money or assets put into the trust. Generally, you won’t pay taxes on distributions of the principal because it’s assumed those assets were already taxed. However, if the trust generates earnings—like interest, dividends, or rent—that income is taxable. If the trust pays that income out to you, you are responsible for paying the income tax on it. This is a critical distinction that will shape your tax planning during the trust administration process.

Why the Type of Trust Matters to You

Knowing whether the trust is revocable or irrevocable gives you a clear roadmap for what to expect. An irrevocable trust often means the grantor did some strategic planning to protect assets and minimize the tax burden on their loved ones. One of the biggest advantages is that these trusts can help reduce or even eliminate estate taxes, which is a relief for many families.

While federal estate taxes only apply to very large estates, some states have their own estate or inheritance taxes with much lower exemption amounts. Luckily, California does not have a state-level estate or inheritance tax. The structure of the trust also determines whether the assets have to go through the court process of probate, which can be time-consuming and expensive. Ultimately, the type of trust reflects the grantor’s goals and directly influences how smoothly assets are transferred to you and what your tax obligations will be.

A California Beneficiary’s Checklist for Trust Payouts

Receiving an inheritance from a trust can feel like a huge responsibility. While there are rules to follow, a few key steps can help you feel confident as you receive your trust payout. Think of this as your short-and-sweet checklist to make the process smoother and keep more of your inheritance in your pocket.

Leverage California’s Tax Advantages

Here’s some great news right off the bat: California is one of the states that does not have an inheritance tax. This means you won’t owe state taxes simply for receiving assets from a trust. Federal estate taxes are also rarely a concern for most people, as they only apply to extremely large estates.

While you get to sidestep a state-level inheritance tax, remember that you may still owe taxes on any income the trust assets generate. For example, if you inherit a rental property, the rental income is taxable. Understanding this distinction is the first step in smart financial management of your inheritance. Proper estate planning by the person who created the trust sets the foundation for these advantages.

Plan Your Payout Timing

When you inherit an asset like a home or stock, its value for tax purposes gets a “stepped-up basis.” This means its cost basis is reset to its fair market value on the date the original owner passed away. This is a huge benefit for you as a beneficiary.

Why? Because if you decide to sell the asset shortly after inheriting it, you’ll likely owe very little, if any, capital gains tax. The “gain” is measured from the new, higher value, not the original purchase price. This gives you flexibility. You can sell immediately to access the cash with minimal tax impact, or you can hold onto the asset and let it grow, knowing your tax basis is already favorably set. The process of trust administration will help clarify these values for you.

Know When to Seek Professional Guidance

You don’t have to figure this all out on your own. In fact, one of the smartest things you can do is assemble a team of professionals. Trust tax rules can be complex, and a small mistake can be costly. An experienced trust attorney can help you understand the specific terms of the trust document, while a CPA can ensure your taxes are filed correctly. A financial advisor can also help you create a long-term plan for your inheritance.

Think of these experts as your personal board of directors, helping you make informed decisions that align with your financial goals. Getting professional guidance is a proactive step to protect your inheritance and give you peace of mind. Learning about a firm’s approach, like the Lawvex difference, can help you find the right fit.

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• S.B. 378: The (Proposed) New California Estate Tax – What Does It Mean for You? – Lawvex

Frequently Asked Questions

Do I have to pay taxes on the money I receive from a trust? Not usually on the main assets you inherit. Think of the trust as having two parts: the original property or money placed inside (the principal) and any new earnings it generates (the income). You generally receive the principal tax-free. However, if the trust’s assets earn money—like stock dividends or rent from a property—and that income is passed on to you, you will need to report it and pay income tax on it.

What does “stepped-up basis” mean for the house I just inherited? This is a huge tax benefit that sounds more complicated than it is. Essentially, the value of the house for tax purposes is reset to its fair market value on the date the person who left it to you passed away. If you decide to sell the house shortly after, you’ll only owe capital gains tax on the profit made since that date, which is often very little. It prevents you from being taxed on decades of appreciation the home may have experienced.

Since I’m in California, is my inheritance completely tax-free? You’re in a great position because California does not have a state-level inheritance or estate tax. This means the state won’t take a cut just because you inherited property. However, “tax-free” doesn’t cover everything. You are still responsible for federal income tax on any earnings the trust generates and distributes to you, and federal capital gains tax if you sell an asset for a profit.

What is the Schedule K-1, and why is it important? The Schedule K-1 is a tax form the trustee will send you each year. Think of it as an official summary that shows your share of the trust’s income for that year. It’s the most important piece of paper you’ll receive for tax purposes because it tells you exactly what numbers to report on your personal tax return. Be sure to keep an eye out for it and save it with your other important documents.

Does it matter if the trust was revocable or irrevocable? Yes, this distinction is very important for estate planning, but for you as the beneficiary receiving the inheritance, the outcome is often similar. A revocable trust becomes irrevocable once the creator passes away. Assets from both types of trusts generally qualify for the “stepped-up basis,” which is the key tax advantage that can save you a significant amount of money if you decide to sell an inherited asset.