Inheritance IRA

If someone inherits a tax-defferred IRA that was purchased by the person who died with money from the sale of a house, does the beneficiary have to pay taxes on the entire amount, or just the increase in value after deducting the original sale amount of the house?

You can't just purchase an IRA. Are you sure it's not a deferred annuity?

If it is an IRA funded with real estate (not likely), then all of it is subject to income taxation. IRAs can be spread out based on the beneficiaries life unless the orginal owner was already taking their Required Minimum Distribution (RMD).

If it is a deferred annuity, income taxes are due on the growth only. The original purchase price of the annuity is considered a return of premium and is tax free to the heir, anything above that is the taxable portion. The taxable portion is considered to come out first, followed by the tax free return of premium. An annuity must be fully paid out within 5 years following the death of the original owner. This will allow you spread out the taxation a bit.