Tennessee does not have an inheritance tax
Tennessee abolished its inheritance tax in 2005. If you inherit money, property, or other assets from someone who died, you will not owe Tennessee state tax on that inheritance. This applies whether the person who died lived in Tennessee or elsewhere — Tennessee itself does not tax what you receive.
However, the absence of a Tennessee inheritance tax does not mean inheritance is completely tax-free. The federal government may tax large estates, and other states where the deceased person lived or owned property might have their own inheritance or estate taxes. Understanding the difference between these taxes and what applies to your situation matters.
Key Takeaways
- Tennessee has no state inheritance tax, so you pay no Tennessee tax on money or property you inherit.
- The federal government taxes estates larger than $13.61 million (as of 2024), but most people do not reach that threshold.
- If the person who died lived in another state with an inheritance tax, that state may tax you on what you inherit.
- Inherited retirement accounts like IRAs and 401(k)s have their own federal tax rules separate from inheritance tax.
Federal estate tax and what it means for you
While Tennessee has no inheritance tax, the federal government does tax very large estates. The federal estate tax applies to estates worth more than $13.61 million as of 2024. This threshold changes yearly and is set by federal law, not by Tennessee.
If the person who died left an estate smaller than this amount — which includes most people — no federal estate tax is owed. The executor or administrator of the estate will not file a federal estate tax return, and you will not receive a tax bill. If the estate is larger, the executor handles the federal tax before distributing money to heirs.
The key point: you as an heir do not pay inheritance tax in Tennessee under any circumstance. The estate itself may owe federal tax if it is very large, but that is a separate matter handled before you receive your share.
What happens if the deceased lived in another state
Six states currently have inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If the person who died lived in one of these states, that state may tax you on what you inherit, even if you live in Tennessee.
The tax you owe depends on your relationship to the deceased and the amount you inherit. Spouses and children often pay lower rates or no tax in these states, while more distant relatives and unrelated heirs pay higher rates. You would file a return in that state, not in Tennessee.
If you inherit property located in another state — such as real estate or a business — you may also owe tax in that state where the property sits. This is separate from inheritance tax and depends on that state's rules.
Inherited retirement accounts and their tax rules
Inherited IRAs, 401(k)s, and other retirement accounts follow federal tax rules that are different from inheritance tax. When you inherit a retirement account, you do not owe inheritance tax in Tennessee, but you will owe federal income tax on the money when you withdraw it.
The timing and amount of tax depend on the type of account and your relationship to the person who died. Spouses can roll inherited IRAs into their own accounts and delay withdrawals. Non-spouse heirs must begin taking withdrawals within a set timeframe, usually within 10 years of the death. Each withdrawal is taxed as income in the year you take it.
The executor of the estate will not handle this tax — you manage it yourself as you withdraw money. A tax professional or the financial institution holding the account can explain your specific withdrawal timeline and tax obligations.
When you might owe tax on inherited property
Inheriting property does not trigger inheritance tax in Tennessee, but selling that property later might create a tax situation. If you sell inherited real estate, stocks, or other assets, you may owe federal capital gains tax on the profit between what the property was worth when you inherited it and what you sold it for.
However, inherited property receives a "step-up in basis," which means the value resets to the date of death. If you inherit a house worth $300,000 and sell it a year later for $310,000, you owe tax only on the $10,000 gain, not on the full $310,000. This step-up applies to most inherited assets and significantly reduces the tax you owe when you sell.
Tennessee has no state capital gains tax, so you would owe only federal tax on the gain. This is a different tax from inheritance tax and applies only when you sell, not when you inherit.
Inherited business interests and real estate
If you inherit a business, farm, or rental property, Tennessee does not tax the inheritance itself. However, you will owe income tax on any profit the business or property generates going forward. If you inherit a rental house, for example, you owe federal income tax on the rent you collect, but not on the house itself.
Some inherited businesses may may have access to for special federal tax treatment if they meet certain size and family-business requirements, but this is a federal matter, not a Tennessee state matter. An accountant or tax attorney can review your specific situation to see whether any special rules explore.
Frequently Asked Questions
Do I have to report an inheritance to Tennessee?
No. Tennessee does not require you to report an inheritance to the state tax authority. You do not file any form with Tennessee about money or property you inherit. If you inherit a business or rental property that generates income, you report that income on your federal tax return, but the inheritance itself is not reported to Tennessee.
What if I inherit money from someone who lived in Pennsylvania?
Pennsylvania has an inheritance tax, so you may owe Pennsylvania tax on what you inherit, depending on your relationship to the deceased and the amount. You would file a Pennsylvania inheritance tax return, not a Tennessee return. Tennessee will not tax you. Contact the Pennsylvania Department of Revenue or a tax professional in Pennsylvania for the specific rate and filing important date.
Is there any tax on inheriting a house in Tennessee?
No state inheritance tax applies. However, if you later sell the house, you may owe federal capital gains tax on the profit. The house receives a step-up in basis at the time of death, so you typically owe tax only on gains after you inherited it, not on the full sale price.
Do I owe tax on an inherited IRA?
You do not owe inheritance tax on an inherited IRA in Tennessee or any other state. However, you will owe federal income tax on withdrawals you take from the account. The amount and timing of tax depend on whether you are a spouse or non-spouse heir and the type of IRA. Consult the financial institution or a tax professional about your withdrawal schedule.
What if the estate is very large?
If the total estate exceeds $13.61 million (2024 threshold), the executor may owe federal estate tax. This is handled by the estate before money is distributed to heirs. Tennessee does not add any additional state tax. The executor's attorney or accountant will manage the federal filing if needed.