Do You Pay Taxes on Inheritance in California?

Inheriting assets involves various tax considerations. While receiving an inheritance may seem straightforward, the tax implications can be complex, depending on the asset type and applicable tax laws. Understanding these nuances is important for anyone who may receive inherited property or funds. Different levels of government and distinct tax rules apply to inherited assets.

California Inheritance Tax

California does not impose an inheritance tax on beneficiaries receiving assets. Inheritance taxes are typically levied by the state where the deceased person resided or where the property is located, and they are paid by the person inheriting the assets.

California abolished its inheritance tax in 1982. This simplifies the process for beneficiaries in California, as they do not face a state-level tax on their inherited portion. However, if an inheritance is received from a person who resided in a state that does have an inheritance tax, the beneficiary might still be responsible for taxes in that other state.

Federal Estate Tax Considerations

Separate from state inheritance taxes, the federal government imposes an estate tax. This tax is applied to the total value of a deceased person’s estate before assets are distributed to heirs, and is the responsibility of the estate itself, rather than individual beneficiaries. For estates of decedents who pass away in 2025, the federal estate tax exemption amount is $13.99 million per individual. This exemption is adjusted for inflation annually.

Due to this high exemption threshold, most estates in the United States do not owe federal estate tax. The maximum federal estate tax rate is 40% on amounts above the exemption. This federal exemption amount is scheduled to decrease significantly in 2026 unless Congress acts to extend current legislation.

Income Tax on Inherited Assets

While the receipt of an inheritance generally does not trigger income tax for the beneficiary, certain types of inherited assets can have income tax implications upon their withdrawal or sale. For instance, inherited retirement accounts, such as traditional IRAs and 401(k)s, do not receive a “step-up in basis.” This means that pre-tax contributions and earnings within these accounts are typically subject to ordinary income tax when they are withdrawn by the beneficiary. Roth IRAs and Roth 401(k)s, however, are generally tax-free upon qualified withdrawal for beneficiaries, as contributions were made with after-tax dollars.

Appreciated property, such as stocks or real estate, often benefits from a “step-up in basis” rule. Under this rule, the cost basis of the inherited asset is reset to its fair market value on the date of the decedent’s death. This can significantly reduce or eliminate capital gains tax liability if the heir sells the asset shortly after inheriting it, as taxes are only owed on any appreciation that occurs after the date of death. If the asset is held for a longer period and appreciates further, capital gains tax may apply to that additional appreciation upon sale.

Other inherited assets, like cash, bank accounts, or personal property, are generally not subject to income tax upon receipt by the beneficiary. However, if any inherited asset generates income after it is received, such as rental income from property or dividends from investments, that ongoing income may be subject to standard income tax. The gain portion of inherited annuities is also typically subject to income tax.

Property Tax Rules for Inherited Real Estate in California

California’s property tax system, governed largely by Proposition 13, generally bases property taxes on the assessed value at the time of purchase, with limited annual increases. When real estate is inherited in California, a “change in ownership” can trigger a reassessment of the property to its current market value, potentially leading to a significant increase in property taxes. This reassessment occurs unless specific exclusions apply.

Proposition 19, which became effective in February 2021, significantly altered the rules for inherited real estate. It eliminated the broad parent-child and grandparent-grandchild exclusions that previously allowed inherited properties, including vacation homes and rentals, to retain their lower assessed value without reassessment. Now, for a primary residence to avoid a full reassessment, the heir must use the inherited property as their own principal residence within one year of the transfer and file for a homeowner’s exemption.

Even with this exclusion, there are limitations. The property’s assessed value will be partially reassessed if its fair market value at the time of inheritance exceeds its original assessed value by more than $1 million. Only the portion of the value within this limit may retain the lower tax base. Understanding these specific rules is important for anyone inheriting real estate in California, as they directly impact ongoing property tax obligations.