An estate tax taxes the value of the estate before the estate is distributed to the heirs. An inheritance tax may be charged to the heirs based on the value of their inheritance. The federal government does not have an inheritance tax and the estate tax does not kick in unless the value of the estate is more than $11 million. Some states may have an inheritance tax and you would have to check with state law on that.
However, even an inheritance tax only applies to the actual transfer of the property. Once you own the property, what you do with it is entirely separate and subject to its own taxation rules. In the case of tangible personal property, you have a capital gain and you owe capital gains tax if you sell the item for more than its cost basis. For an inherited item, the cost basis is the fair market value on the date of the previous owners death, plus any adjustments that you can make for the cost of permanent improvements. This usually applies to real property, but it could apply to a motorcycle—if you pay to have it restored after you inherited it, for example, those restoration costs would add to the cost basis.
If you sell for the cost basis, you don’t have a capital gain. If you sell for more than the cost basis, only the amount over the cost basis is the taxable capital gain. Inherited items are always taxed as long-term capital gains, no matter how long you actually owned the item, and the long-term capital gains rate is 0%, 15%, or 20%, depending on your other income.
You must make diligent efforts to document the fair market value on the date of the previous owners death, because if you are audited, the IRS does not have to allow any cost basis that you can’t prove.
