Is Inheritance Taxable in California?

Inheriting assets often raises questions about potential tax implications. While California does not impose an inheritance tax on beneficiaries, other federal or state taxes might apply depending on the circumstances and the type of asset transferred.

California’s Stance on Inheritance Tax

California stands out among states by not levying an inheritance tax. The state officially repealed its inheritance tax in 1982 through the passage of Proposition 3. This repeal clarified that the state does not tax the beneficiary’s right to receive inherited property. Therefore, individuals who receive assets or property from a deceased person’s estate in California do not owe a state tax on that inheritance.

Federal Estate Tax Considerations

While California does not have an inheritance tax, a separate federal estate tax may apply to very large estates. This federal tax is levied on the deceased person’s estate itself, not on the individual beneficiaries receiving the assets. It is a tax on the right to transfer property at death.

The federal estate tax applies only to estates exceeding a high exemption threshold, which is adjusted annually for inflation. For deaths occurring in 2025, an individual’s estate can transfer up to $13.99 million without incurring federal estate tax. Most estates do not reach this threshold, meaning most heirs will not be impacted. Any portion of an estate exceeding this limit is subject to a maximum federal estate tax rate of 40%.

Income Tax on Inherited Assets

Inherited assets are generally not subject to federal or state income tax when first received due to the “stepped-up basis” rule. This rule adjusts the asset’s cost basis to its fair market value on the date of the decedent’s death. For example, if you inherit stock purchased long ago for a low price, your new basis becomes its value at the time of inheritance, potentially reducing or eliminating capital gains tax if you later sell it.

However, certain types of inherited assets or income generated from them can be subject to income tax. Inherited tax-deferred retirement accounts, such as traditional IRAs or 401(k)s, do not receive a stepped-up basis. Distributions from these accounts to the beneficiary are taxed as ordinary income in the year they are withdrawn, similar to how the original owner would have been taxed. Any income earned after the inheritance, such as rental income from inherited property or dividends from inherited stocks, is subject to standard income tax rules for the beneficiary.

Property Tax on Inherited Real Estate

Inheriting real estate in California introduces specific property tax considerations. When real property is transferred due to death, it can trigger a reassessment of the property’s value for property tax purposes. This reassessment can lead to higher annual property tax bills for the new owner, based on the property’s current market value rather than its historical assessed value.

California’s Proposition 19, effective February 16, 2021, significantly changed the rules for inherited properties. It limits the property tax exclusion for transfers between parents and children (or grandparents and grandchildren) primarily to cases where the inherited property becomes the heir’s principal residence. To qualify for the exclusion, the property must remain the primary residence of the heir, and any change in ownership that does not meet this requirement will result in a property tax reassessment. Heirs must file specific forms, such as a claim for reassessment exclusion, with the county assessor’s office within a certain timeframe to claim any applicable exclusion.