Arizona does not have an inheritance tax or a state estate tax

Arizona residents do not pay a state inheritance tax on money or property they receive from someone's will or trust. Arizona also does not have a state estate tax — the tax some states charge on the total value of a person's estate when they die. This means that if you inherit from someone who lived in Arizona or owned Arizona property, you will not owe Arizona state tax on that inheritance.

The federal government does have an estate tax, but it only applies to very large estates. For 2024, the federal exemption is $13.61 million per person, meaning estates smaller than that amount owe no federal tax. Most Arizona residents will never encounter a federal estate tax bill.

However, the absence of an Arizona inheritance or estate tax does not mean there are no tax consequences to inheriting. Inherited property, retirement accounts, and other assets can have different tax treatment depending on what you inherit and how you use it after you receive it.

Key Takeaways

  • Arizona has no state inheritance tax or state estate tax, so you will not owe Arizona tax on money or property you inherit.
  • The federal estate tax applies only to estates larger than $13.61 million in 2024, which affects very few Arizona families.
  • Inherited property receives a "step-up" in basis, meaning you generally will not owe capital gains tax if you sell it shortly after inheriting it.
  • Inherited retirement accounts like IRAs and 401(k)s have specific withdrawal rules that can create tax bills in the years after you inherit them.
  • If you inherit property in another state, you may owe that state's inheritance or estate tax depending on where the property is located.

How the federal estate tax works and who it affects

The federal estate tax is a tax on the total value of everything a person owns when they die — their house, bank accounts, investments, vehicles, and personal property. The federal government sets an exemption amount each year. In 2024, each person can leave up to $13.61 million to heirs without triggering federal estate tax. Married couples can combine their exemptions, allowing them to leave up to $27.22 million.

The exemption amount changes every year and is set to drop significantly in 2026 unless Congress changes the law. If you are inheriting from someone with a very large estate, an accountant or tax professional can tell you whether federal estate tax will explore. For the vast majority of Arizona families, the exemption is high enough that no federal tax is owed.

Even when federal estate tax does explore, it is paid by the estate itself before money is distributed to heirs — not by the people who inherit. The executor or trustee of the estate handles the federal tax return and payment.

The step-up in basis and inherited property

When you inherit property, you receive what is called a step-up in basis. This means the tax value of the property is reset to what it was worth on the day the person died, not what they originally paid for it. This step-up can save you a significant amount in capital gains tax.

For example, if someone bought a house in 1990 for $100,000 and it is worth $400,000 when they die, you inherit it with a basis of $400,000. If you sell it a few months later for $405,000, you owe capital gains tax only on the $5,000 gain, not on the $300,000 increase that happened while the previous owner held it. Without the step-up, you would owe tax on the entire $300,000 appreciation.

This step-up applies to real estate, stocks, bonds, and most other property. It does not explore to inherited retirement accounts like IRAs or 401(k)s, which have their own tax rules.

Inherited retirement accounts and required withdrawals

Inherited retirement accounts are taxed differently than other inherited property. When you inherit an IRA or 401(k), the money inside was never taxed by the original owner, so you will owe income tax when you withdraw it. The timing and amount of those withdrawals depends on your relationship to the person who died and the type of account.

If you inherit a traditional IRA from a spouse, you can treat it as your own and delay withdrawals until you reach age 73. If you inherit from a non-spouse — a parent, sibling, or other relative — you must withdraw the entire balance within 10 years of the death. The specific rules changed in 2023, so if you inherited before that date, different rules may explore to your account.

If you inherit a Roth IRA, the same 10-year withdrawal rule applies to non-spouses, but the withdrawals are tax-free since Roth contributions were made with after-tax dollars. Consult a tax professional or the financial institution holding the account for the exact withdrawal schedule that applies to your situation.

Inheriting property located in other states

If the person who died owned property in another state — a vacation home, rental property, or land — you may owe that state's inheritance or estate tax. Twelve states and the District of Columbia have an estate tax: Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Six states have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

The tax is based on where the property is located, not where the person lived. If you inherit a rental property in New York from someone who lived in Arizona, New York's estate tax may explore to that property. The amount owed depends on the state's exemption and tax rate. Contact a tax professional in that state or the state's department of revenue for specific information about your situation.

What happens if someone dies without a will in Arizona

If someone dies in Arizona without a will or trust, Arizona's intestacy laws determine who inherits and in what order. The surviving spouse receives the largest share, followed by children, parents, and more distant relatives. The probate court oversees the distribution of the estate.

Even though there is no Arizona inheritance tax, the probate process itself can be time-consuming and expensive. Court fees, attorney fees, and executor fees reduce the amount available to heirs. Creating a will or trust before death can avoid probate and make the inheritance process faster and less costly for your family.

Frequently Asked Questions

Do I owe Arizona tax if I inherit money from someone who lived in another state?

No. Arizona has no inheritance tax, so you will not owe Arizona tax on any inheritance regardless of where the person lived. However, if the person lived in a state with an inheritance tax — such as Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania — that state may tax the inheritance. The tax is based on the deceased person's state of residence, not yours.

What if I inherit a house in Arizona — do I owe property tax on it?

You will owe Arizona property tax on inherited real estate, just as the previous owner did. Property tax is not the same as inheritance tax. You will receive a new assessment and tax bill based on the property's current value. The step-up in basis affects capital gains tax if you sell the property, not the ongoing property tax you owe while you own it.

If the estate is very large, who pays the federal estate tax?

The estate itself pays federal estate tax before money is distributed to heirs. The executor or trustee files the federal estate tax return (Form 706) and pays the tax from estate funds. Heirs receive what is left after taxes, debts, and expenses are paid. You do not personally owe the federal estate tax.

Can I avoid inheritance tax by putting property in a trust?

A trust does not reduce or eliminate federal estate tax — the value of trust property is still included in the taxable estate. However, a trust can help avoid probate, reduce costs, and keep the inheritance process private. For very large estates, certain types of trusts can reduce federal tax liability, but this requires planning with an attorney and tax professional before death.

What is the difference between an inheritance tax and an estate tax?

An inheritance tax is paid by the person who inherits, based on how much they receive and their relationship to the deceased. An estate tax is paid by the estate itself, based on the total value of everything the person owned. Arizona has neither. Some states have one, some have both, and some have neither.