Is There an Inheritance Tax in California?

Inheriting assets often brings questions about potential tax obligations. California does not levy an inheritance tax on beneficiaries who receive property or money from a deceased person. However, inheriting assets in California can involve other tax considerations related to the property itself or the income it generates.

California’s Stance on Inheritance Tax

California does not have a separate state estate tax, which is a tax on the deceased person’s estate before assets are distributed. This differs from an inheritance tax, which is paid by the recipient of assets.

Historically, California had an inheritance tax, repealed by voters through Proposition 6 in June 1982. Following this, California introduced a “pick-up tax,” equal to the maximum state death tax credit against the federal estate tax. This allowed California to collect federal estate tax revenue without increasing the total tax burden. The federal credit for state death taxes was phased out by 2005, effectively ending California’s pick-up tax.

Taxes on Inherited Property and Income in California

Even without an inheritance tax, certain other taxes can apply to inherited property and income in California. Real property, such as a home, can be subject to reassessment for property tax purposes upon inheritance. California’s Proposition 13 limits annual property tax increases, but a “change of ownership” typically triggers a reassessment to current market value.

Proposition 19, effective February 16, 2021, significantly altered property tax exclusions for inherited real estate. Under this law, if an inherited primary residence is not used as the new owner’s principal residence within one year, it will be reassessed at its fair market value. Even if the heir occupies it as their primary residence, a partial reassessment can occur if the property’s market value exceeds its original taxable value by more than $1 million. Other types of inherited real property, like vacation homes or rental properties, no longer qualify for any reassessment exclusions and are fully reassessed to market value upon inheritance.

Inherited assets generally receive a “stepped-up basis” to their fair market value at the time of the decedent’s death. This adjustment can reduce the capital gains tax liability if the asset is later sold, as capital gains are calculated from this new, higher basis. However, income generated by inherited assets, such as rent from a property or dividends from stocks, is taxable income to the beneficiary. Inherited retirement accounts, like IRAs and 401(k)s, generally do not receive a stepped-up basis, and distributions are typically taxed as ordinary income to the beneficiary. The SECURE Act, enacted in 2020, generally requires most non-spouse beneficiaries to withdraw all funds from an inherited retirement account within 10 years of the original owner’s death, accelerating the tax impact compared to previous “stretch IRA” rules.

The Federal Estate Tax

The federal estate tax is a separate tax imposed on the right to transfer property at death, levied on the deceased person’s estate rather than on the beneficiaries. This is different from an inheritance tax, which would be paid by the recipient of the assets. The federal estate tax applies only to very large estates due to a substantial exemption threshold.

For 2024, the federal estate tax exemption amount is $13.61 million per individual, meaning estates valued below this amount generally do not owe federal estate tax. This exemption amount is adjusted annually for inflation and is scheduled to change in future years. Due to this high exemption, the vast majority of estates, including those in California, are not subject to federal estate tax. A surviving spouse can also utilize any unused portion of their deceased spouse’s federal estate tax exemption through a provision called “portability,” which can effectively double the exemption for married couples.