What Is the Gift Tax in California and How Does It Work?

For individuals living in California, understanding how gifts are treated for tax purposes requires examining both federal regulations and specific state implications. This guide clarifies what constitutes a gift and the potential tax consequences involved when transfers occur, offering a clear picture of obligations and considerations.

California’s Approach to Gift Taxation

California distinguishes itself by not imposing a state-level gift tax on transfers of property or money. Residents are primarily concerned with federal gift tax regulations rather than a distinct state tax.

Understanding the Federal Gift Tax

The Internal Revenue Service (IRS) defines a gift as any transfer to an individual, either directly or indirectly, where something of lesser or no value is received in return. This can include cash, real estate, stocks, or other types of property. The responsibility for paying federal gift tax falls on the donor, not the recipient.

The federal system includes an annual gift tax exclusion. For 2025, this annual exclusion amount is $19,000 per recipient. Individuals can give this amount to as many people as they wish each year without incurring gift tax. If a gift is made by a married couple, they can combine their exclusions, allowing them to gift up to $38,000 to a single recipient in 2025. Gifts below this annual exclusion do not count against an individual’s lifetime exemption.

Gifts exceeding the annual exclusion amount do not automatically result in gift tax being owed. Instead, the excess amount reduces the donor’s lifetime gift tax exemption. This exemption is a cumulative amount that an individual can gift over their lifetime without paying federal gift tax. For 2025, the lifetime gift tax exemption is $13.99 million per individual.

Certain types of transfers are exempt from federal gift tax and do not count against either the annual exclusion or the lifetime exemption. These include direct payments for someone’s tuition to an educational institution, or for medical expenses to a healthcare provider. Gifts to a spouse who is a U.S. citizen are unlimited. Contributions to qualified charitable organizations and political organizations are also exempt from gift tax.

When gifts to an individual exceed the annual exclusion amount in a calendar year, the donor is required to file IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. This form is used to report the gift and track the amount that reduces the donor’s lifetime exemption, even if no tax is immediately due. The deadline for filing Form 709 is April 15 of the year following the gift.

California Tax Implications for Gifted Assets

Gifting certain assets can still trigger other state tax consequences, particularly concerning real estate and capital gains. These implications are important for donors and recipients.

Gifting real estate in California can lead to property tax reassessment. Under Proposition 13, property taxes are based on the assessed value at the time of acquisition, adjusted annually for inflation. However, a “change in ownership” triggers a reassessment to the property’s current market value. Gifting real property constitutes a change in ownership.

Proposition 19, effective February 16, 2021, altered property tax exclusions for gifted real estate. Transfers of a primary residence between parents and children, or grandparents and grandchildren, are now subject to stricter rules. To qualify for an exclusion from reassessment, the gifted property must have been the donor’s primary residence and must become the recipient’s primary residence within one year of the transfer. If the market value of the gifted primary residence exceeds its original factored base year value by more than $1 million (adjusted for inflation), the excess amount is added to the property’s new taxable value. Transfers of other types of real estate, such as rental properties or vacation homes, no longer qualify for the parent-child or grandparent-grandchild exclusion.

Another California tax implication for gifted assets relates to the income tax basis. When an asset like stocks or real estate is received as a gift, the recipient takes on the donor’s original cost basis, known as a “carryover basis.” This means that if the recipient later sells the gifted asset, any capital gains will be calculated based on the difference between the sale price and the donor’s original purchase price, not the value at the time of the gift. This can result in a larger capital gains tax liability for the recipient under California income tax rules, as they may owe tax on appreciation that occurred while the donor owned the asset.

This differs from assets received through inheritance, which receive a “stepped-up basis.” With a stepped-up basis, the asset’s value for tax purposes is reset to its fair market value on the date of the original owner’s death. This adjustment can reduce or even eliminate capital gains tax if the asset is sold shortly after inheritance, as the appreciation during the decedent’s lifetime is not taxed. The carryover basis rule for gifted assets means careful planning is necessary to understand the potential future capital gains tax consequences for the recipient.