The House Will Get a Fresh Tax Basis the Day He Dies. The $620,000 IRA Next to It Will Get Nothing, and the Kids Will Owe Income Tax on Every Dollar.
An Ohio widower left his two children equal shares of a house and a traditional IRA, and federal tax law treated those two assets as if they came from different planets. Understanding why could reshape how you pass wealth to…
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Living in Ohio, the widowed retired engineer in his late 70s had an estate plan that fit on one page. The house went to his son and daughter. So did his traditional IRA, worth $620,000. His will left $100,000 to his church, payable when the house sold.
The house sold within a year. He had paid $140,000 for it decades earlier, and it valued at $560,000 when he died. The children owed no capital gains tax on the sale.
Then the IRA custodian’s paperwork arrived. Every dollar of that account would land on the children’s own tax returns, stacked on top of their salaries, on a 10-year schedule.
Two Assets Follow Opposite Tax Rules
The house falls under Section 1014 of the Internal Revenue Code. An heir’s basis in inherited property is “the fair market value of the property at the date of the decedent’s death”. This eliminates $420,000 of appreciation for income tax purposes.
The IRA gets no reset. Section 408(d)(1) says any amount distributed from an IRA “shall be included in gross income” by whoever receives it. Pre-tax money stays pre-tax money after death.
The schedule comes from the SECURE Act. Eligible designated beneficiaries, per IRS Publication 590-B, include a surviving spouse, a minor child, a disabled or chronically ill person, or anyone not more than 10 years younger than the IRA owner. Adult children rarely qualify. The account must be emptied by December 31 of the year containing the 10th anniversary of the owner’s death. Because he had already begun lifetime distributions, they also owe annual required minimum distributions along the way. Money left after the deadline is subject to the excise tax.
Estate tax did not apply either way. The 2026 basic exclusion is $15,000,000.
$136,400 Is the Best Case
Assumptions: each child files jointly with $160,000 of taxable income, 2026 federal brackets, no state tax, and a flat account value.
Each child inherits $310,000. Divided equally, that is $31,000 a year. For joint filers, the 22% bracket covers income over $100,800, and 24% starts above $211,400. Every withdrawal lands at 22%.
Tax per child: $6,820 a year, or $68,200 over the decade. For both children: $136,400.
Waiting Until Year 10 Costs $10,488 More Per Child
Many heirs take only the minimum and let the rest ride. To separate the bracket effect, assume the full share comes out in one year. Taxable income jumps to $470,000.
- $51,400 taxed at 22%
- $192,150 taxed at 24%, up to $403,550
- $66,450 taxed at 32%
Tax per child: $78,688. That is $10,488 more than the even spread, and $157,376 for the pair.
Pointing the Charity at the IRA Saves $22,000
The better path required one beneficiary form. A church is tax-exempt, so it owes no income tax on IRA dollars it receives.
Had he named the church as beneficiary of $100,000 of the IRA and left the full house proceeds to his children, the church would have collected the same gift. The children would have inherited $520,000 of IRA, or $260,000 each, which works out to $26,000 a year. The $100,000 that transferred to stepped-up house money carries zero income tax, instead of $22,000 at 22%.
Giving appreciated or stepped-up assets to family and pre-tax dollars to charity is the whole idea behind a handful of tax-smart giving moves (donor-advised funds, QCDs, beneficiary routing), which we laid out in a free guide here: Giving Without Bleeding.
Roth conversions during his life were a second tool. The tax lands on his return at his rate, and qualified Roth distributions come out tax-free to heirs, though the 10-year deadline still applies.
Four Moves That Protect the Heirs
- Pull every beneficiary form and compare it to the will. The IRA passes by its form, and the will has no say over it.
- Direct charitable gifts through the IRA designation. Leave stepped-up assets, like the house and taxable brokerage accounts, to family.
- Hold appreciated real estate until death. Section 1014 covers property acquired from a decedent. Deeding the house to the children while alive gives up the reset.
- Heirs: ask the custodian whether the parent had started taking required minimum distributions. Then map withdrawals across all ten years to stay under the 24% line of $211,400 for joint filers.
An estate tax attorney or CPA can run these numbers against your family’s actual brackets and state taxes.
Remember This One Number
The house reached the children with $420,000 of gain erased. The IRA came with a federal tax bill of at least $136,400, and that second number is the one to plan around.
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Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
