Is Inheritance Taxable in Arizona? Federal Tax, IRAs, and Basis

Inheritance is not taxable in Arizona at the state level. Arizona imposes no inheritance tax, no state estate tax, and no state gift tax, so receiving money or property from someone who died does not, by itself, create a state tax bill. What you may owe instead depends on what kind of asset you inherited, whether the estate is large enough to trigger the federal estate tax, and what you do with the asset after it becomes yours.¹

No Arizona Inheritance or Estate Tax

Arizona repealed its estate tax provisions in 2006, effective for anyone who died after 2004.¹ Since then, no Arizona resident has owed the state anything simply for receiving an inheritance, regardless of the amount or the relationship to the deceased.

You do not report an inheritance as income on your Arizona return. Arizona’s tax code conforms to the Internal Revenue Code as of January 1, 2026, so the state generally follows the federal treatment of inherited assets, which also excludes the value of the inheritance itself from taxable income.²

When Federal Estate Tax Can Still Apply

The federal estate tax is the one transfer tax that could reach an Arizona estate, and it is paid by the estate through the executor, not by individual beneficiaries. For someone who dies in 2026, the federal estate and gift tax exemption is $15 million per person. Only the portion above that amount is taxed, at a top rate of 40%.³⁴

The $15 million exemption was made permanent by the One Big, Beautiful Bill Act, signed into law in July 2025, and starting in 2027 it will be indexed for inflation.⁵⁶⁷⁸

For most Arizona families, the estate tax will never come up. The practical tax questions arise later, when you actually use or sell what you inherited.

Inherited Retirement Accounts Are Taxable Income

The one place most Arizona beneficiaries end up owing tax is on inherited retirement accounts. Traditional IRAs, 401(k)s, pensions, and annuities are treated as income in respect of a decedent, which means every dollar you withdraw is taxed as ordinary income the same way it would have been taxed to the original owner.⁹

You report those withdrawals on your federal Form 1040 and your Arizona return. Arizona taxes the distributions at its flat 2.5% income tax rate, on top of federal tax at your marginal bracket.¹⁰

The 10-Year Withdrawal Window

If you are a non-spouse beneficiary who inherited a retirement account from someone who died after 2019, the SECURE Act generally requires you to empty the account by the end of the tenth year after the owner’s death.⁹ Concentrating those withdrawals into a single year can push you into a higher federal bracket, so spreading them across the ten-year window often reduces the total tax bite.

Some beneficiaries qualify as eligible designated beneficiaries and can stretch distributions over their own life expectancy instead:

Surviving spouses, who can also roll the account into their own IRA and delay withdrawals until they reach their required minimum distribution age of 73.¹¹
Minor children of the account owner, with the 10-year clock starting at the age of majority.
Disabled or chronically ill individuals.
Beneficiaries no more than 10 years younger than the deceased owner.

Stepped-Up Basis on Stocks, Real Estate, and Other Capital Assets

For capital assets other than retirement accounts, the tax picture is much friendlier. When you inherit stocks, mutual funds, real estate, or similar property, the tax basis resets to the fair market value on the date of the owner’s death.¹² All the appreciation that built up during the previous owner’s lifetime is wiped out for capital gains purposes.²

Say a parent bought a home for $150,000 that was worth $450,000 the day they died. Your basis is $450,000. Sell it soon after for $450,000 and your capital gain is zero. Hold it and sell later for $500,000 and you only pay capital gains tax on the $50,000 of appreciation after you inherited it. Arizona conforms to this federal rule, so the same basis applies for state income tax.

If the Person Who Died Lived in Another State

Arizona’s rules only protect you from Arizona taxes. Five states still impose an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. (Iowa repealed its inheritance tax effective January 1, 2025.) These taxes are generally tied to the decedent’s state of residence and the location of the assets, not to where the beneficiary lives.

If a parent lived in Pennsylvania and left you $500,000, Pennsylvania may tax that inheritance at rates that depend on your relationship to the deceased, even though you live in Arizona. Close relatives typically pay lower rates or qualify for exemptions; unrelated beneficiaries pay the most. Arizona will not add any tax on top of what the other state charges, but it will not offset it either. The estate planning attorney in the other state is the right person to estimate the liability.

Real Estate: Transfer, Basis, and Property Tax

Arizona has no real estate transfer tax and no documentary stamp tax on inherited property. Recording the change of ownership at the county recorder’s office involves only a small filing fee.

Title usually transfers in one of two ways. If the property goes through probate, the court issues documents (often a deed of distribution) that you record with the county. For smaller estates, or where the deceased used a beneficiary deed, an affidavit of succession filed with the county recorder can transfer ownership without full probate.

Inheritance does not automatically trigger a full reassessment of the property’s value. The assessed value generally carries over. If the prior owner had a senior valuation freeze or another assessment reduction, though, those do not follow the property to you; you have to reapply in your own name if you qualify. Once title is in your name, you owe ongoing property taxes at the rate for the property’s classification and location. When you eventually sell, the stepped-up basis applies, so your taxable gain runs from the value at the date of death rather than from whatever the original owner paid.¹²

1
Arizona Department of Revenue. Arizona Estate Tax Information
2
Internal Revenue Service. Gifts and Inheritances
3
Internal Revenue Service. What’s New – Estate and Gift Tax
4
Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax
5
Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax
6
Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse
7
Internal Revenue Service. Frequently Asked Questions on Estate Taxes
8
Internal Revenue Service. Filing Estate and Gift Tax Returns
9
Internal Revenue Service. Retirement Topics – Beneficiary
10
Arizona Department of Revenue. Individual Income Tax Highlights
11
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
12
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent