Final answer:
The value of the residence Steve inherited from John can indeed be excluded from Steve's gross income because it is considered an inheritance, and inheritances are generally not counted as taxable income. In the United States, there are estate taxes, but these typically apply to large estates and not to most inheritances.
Step-by-step explanation:
The value of the residence can indeed be excluded from Steve's gross income as it qualifies as an inheritance. In the scenario provided, when John died, Steve inherited the house which is a common practice and legally recognized. Inheritance taxes are levied on the value of such inheritances, but they generally do not affect transfers of property between deceased persons and their heirs. Consequently, the inheritance is not considered taxable income for Steve.
The United States does have an estate tax, which is imposed on the value of an inheritance. However, the estate tax laws provide that only large estates, those valued over a certain threshold, are subject to taxation. According to the Center on Budget and Policy Priorities, in 2015, for instance, inheritances of more than $5.43 million were subject to this tax, ensuring that most people's inheritances are exempt.