Gifts and Inheritances: Are They Income?
Published November 6, 2026
A gift or an inheritance is often not income to the person who receives it. The rule is simple at first, but the income that the property later produces can be taxable. This guide explains the general rule, the income that follows the property, and the case of a payment for services. It is general information. It is not advice about your return.
The general rule
Publication 525 says that, in most cases, property you receive as a gift, bequest, or inheritance is not included in your income. A bequest is property left to you under a will. The rule covers the property itself. It does not turn the property into income when you receive it.
Income the property produces
The rule changes once the property starts to earn money. If property you receive this way later produces income, such as interest, dividends, or rent, that income is taxable to you. A gift of stock that pays dividends is one example. A house you inherit and rent out is another. The rent you collect is income, even though the house itself was not.
Trusts follow a similar rule. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income is taxable to you. If the gift or bequest is the income from the property, that income is also taxable to you.
Payment for services
A gift is different from payment for work. If you receive cash or other property as a bequest for services you performed while the person was alive, the value is taxable compensation. The label on the document does not change the result. Ask what the payment was for. If it paid you for work, it is income.
Payments for lost wages or lost business income are also taxable, under the rule for lost income in Publication 525. A payment that replaces income you would have earned is treated as income.
An example
Ana inherits a small rental house from her aunt. The house itself is not income to Ana. After the transfer, Ana rents the house for $800 a month. The rent is income to her, and she reports it on her return. Ana also receives a gift of shares that pay dividends. The dividends are taxable to her, even though the shares were a gift. This example uses made-up figures. It shows how the rule works. It is not a result for a real return.
Common mistakes
- Assuming all income from inherited property is not taxable. The property is not income, but its rent, interest, and dividends can be.
- Treating a payment for past work as a gift. If the payment was for services, it is income.
- Forgetting trust distributions. Income paid to you from a trust can be taxable even when the trust holds the property.
- Missing the income on a gifted account. Interest or dividends from a gifted account must be reported each year.
What to do next
Keep the will, trust papers, or gift letter that describes the transfer. Record the date you received the property. Keep statements that show any interest, dividends, or rent that the property produces. If you are unsure whether a payment is a gift or pay for work, ask the person who made the payment for a written explanation. For how the cost basis of inherited property is set, read our guide to inherited property basis and the date of death. For property you received as a gift, read gifted property cost basis basics.
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Sources: Sources: IRS, Publication 525 (2025), Taxable and Nontaxable Income, Gifts and inheritances; Bequest for services (https://www.irs.gov/pub/irs-pdf/p525.pdf) This is general information, not advice about your specific return.
