Exclusion of Inheritances from Gross Income
November 2025
Most agree that the only certainties in life are death and taxes. It may come as a surprise that income tax is not imposed at death. This is due to the exclusion under I.R.C. § 102 for property acquired by bequest, devise, or inheritance.
Exclusion from Gross Income
The general rule is set forth in I.R.C. § 102(a), which provides that gross income does not include the value of property acquired by bequest, devise, or inheritance. This exclusion also applies to gifts.
This potent exclusion is not subject to any dollar limitation. It is beneficial for estates of all sizes.
EXAMPLE: A owns stocks, bonds, and real property with an aggregate value of $1 million. In 2025, A dies and A’s will bequeaths all property to A’s child, C. C’s gross income does not include the property of $1 million bequeathed to C. I.R.C. § 102(a).
EXAMPLE: A owns stocks, bonds, and real property with an aggregate value of $100 million. In 2025, A dies and A’s will bequeaths all property to A’s child, C. C’s gross income does not include the property of $100 million bequeathed to C. I.R.C. § 102(a).
Taking the exclusion under I.R.C. § 102 together with the new basis under I.R.C. § 1014, property acquired from a decedent generally escapes income tax entirely at death. By virtue of the gross income exclusion under I.R.C. § 102, property acquired from a decedent is not subject to income tax. By virtue of the step up of basis under I.R.C. § 1014, any built in gain existing on the date of death is eliminated.
Not all property acquired from a decedent, however, is excluded from gross income. Several exceptions exist, including with respect to income, income from property, income from an interest in an estate or trust, income in respect of a decedent, and property exchanged for services, as well as prizes, awards, scholarships, and grants. I.R.C. § 102(b); I.R.C. § 691.
For more information, please consider the treatise for income tax issues in estate planning, “Income Taxation of Property Acquired from a Decedent.”