Does California Have an Inheritance Tax? Ultimate 2024 Guide

The short answer: No, California does not have an inheritance tax. If you’re inheriting money or property in California, you won’t owe state taxes on that inheritance. However—and this is important—the federal government might have other ideas, and there are several related taxes that could affect your situation. Let me walk you through what actually matters for your wallet.

California Has No Inheritance Tax

Let’s be crystal clear: California abolished its inheritance tax back in 2005. Before that, the state had imposed a tax on beneficiaries who inherited property. Today, that’s completely gone. You won’t find an inheritance tax on your California state tax return, and the state won’t send you a bill based on what you’ve inherited.

This puts California in good company. Most states don’t have inheritance taxes. Only six states currently impose them: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If you’re inheriting in California, you’ve got one less thing to worry about at the state level.

But here’s where people get confused: the absence of a state inheritance tax doesn’t mean inheritance is tax-free. It just means California isn’t taking a cut. The federal government is a different story.

Federal Estate Tax Still Applies

While California has no inheritance tax, the federal estate tax is alive and well—though it affects far fewer people than most think. The federal government taxes estates (the total value of everything someone owned at death) if they exceed a certain threshold.

For 2024, that threshold is $13.61 million per person. Married couples can double that to $27.22 million. These limits are scheduled to drop significantly in 2026 unless Congress acts, reverting to around $7 million per person (adjusted for inflation).

Here’s the key: if your deceased relative’s total estate was worth less than these amounts, there’s no federal estate tax owed. Period. For most California families, this isn’t an issue. According to the Federal Reserve, fewer than 0.1% of estates pay federal estate tax.

The estate’s executor or administrator handles federal estate tax filings, not individual beneficiaries. You inherit what’s left after taxes and debts are paid.

Who Actually Pays Federal Estate Tax

If an estate does exceed the federal threshold, the estate itself pays the tax before distributing money to heirs. This typically only affects wealthy families, business owners, or those with significant real estate holdings.

California has a lot of high-net-worth individuals, particularly in tech, entertainment, and real estate. If you’re inheriting a substantial amount—especially if it includes California property—there’s a chance the estate might owe federal taxes. But again, this is the exception, not the rule.

The executor files Form 706 (the federal estate tax return) if required. This is handled before you receive your inheritance, so you’re not personally liable for the federal estate tax.

California-Specific Inheritance Considerations

While California doesn’t tax inheritance directly, the state does have some unique rules that affect heirs. One major consideration is how property taxes work on inherited real estate.

California uses Proposition 13, a property tax limitation law. Here’s what matters for inheritance: when you inherit real estate in California, the property is typically reassessed at current market value for property tax purposes. This means your property taxes could increase significantly after inheritance, even though you didn’t buy the property.

However, there’s an exception: if you inherit from a parent or grandparent, you may qualify for a property tax exclusion on the first $1 million of the property’s value. This is called the parent-to-child exclusion. You must file the proper forms with your county assessor to claim it.

Additionally, inherited property in California doesn’t automatically transfer the previous owner’s property tax base. The county assessor will reassess the property, which often means higher taxes for heirs.

Step-Up in Basis for Heirs

Here’s something that actually works in your favor: the step-up in basis. This is a federal rule, but it significantly affects California heirs.

When someone dies, their assets receive a “step-up” in basis to their fair market value on the date of death. In plain English: if your relative bought stock for $10,000 and it was worth $50,000 when they died, your cost basis becomes $50,000. If you sell it immediately after inheriting, you owe no capital gains tax.

This is huge. It’s one of the biggest tax advantages in the entire tax code. If you inherit appreciated assets—stocks, real estate, cryptocurrency—you can sell them without owing capital gains tax on the appreciation that happened during the deceased person’s lifetime.

This applies to all California heirs, regardless of the estate size. It’s one of the few inheritance-related tax breaks available to most people.

Property Taxes on Inherited Real Estate

Inheriting California real estate comes with specific tax implications. Beyond the reassessment issue mentioned earlier, you’ll want to understand income tax on rental properties or vacation homes.

If you inherit rental property in California, you’ll owe federal income tax on the rental income you receive. California also has a state income tax (up to 13.3% for high earners), which applies to rental income. However, you can deduct mortgage interest, property taxes, maintenance, and depreciation, which can significantly reduce your taxable income.

If you inherit your parents’ home and plan to live in it, the step-up in basis helps tremendously. You won’t owe capital gains tax if you eventually sell it, as long as you live there for at least two of the five years before the sale (for the primary residence exclusion).

For inherited vacation homes or investment properties, the tax situation is more complex. Consider consulting a CPA familiar with California real estate taxation.

Income From Inherited Assets

Inheriting money itself isn’t taxable. But income generated from that money is. This is a critical distinction.

If you inherit $100,000 in cash, that $100,000 is not subject to income tax. But if you invest it and earn $3,000 in interest or dividends, that $3,000 is taxable income to you. You’ll report it on your federal return and your California state return.

The same applies to inherited retirement accounts like IRAs or 401(k)s. The inherited account balance itself isn’t taxed, but distributions you take are subject to income tax. The rules here changed significantly with the SECURE Act, which requires most non-spouse beneficiaries to empty inherited IRAs within 10 years.

If you inherit a business, the situation becomes more complicated. You’ll likely owe income tax on business profits, plus potentially self-employment taxes if you operate it as a sole proprietor.

Smart Estate Planning Strategies

If you’re the one doing the planning (thinking about your own estate), there are several strategies to minimize taxes for your California heirs:

Use the Annual Gift Exclusion: You can give up to $18,000 per person per year (2024) without gift tax consequences. Married couples can give $36,000 per recipient. This reduces your taxable estate over time.

Establish a Trust: A revocable living trust helps avoid probate in California and can provide privacy for your heirs. It doesn’t reduce estate taxes, but it simplifies the inheritance process and keeps your affairs private.

Utilize the Portability Election: Married couples can file a federal estate tax return after one spouse dies to “port” the unused exemption to the surviving spouse. This effectively doubles the exemption for couples.

Consider Charitable Giving: If you’re charitably inclined, a charitable remainder trust or donor-advised fund can reduce your taxable estate while supporting causes you care about.

Life Insurance Planning: Life insurance proceeds aren’t subject to income tax, but they are included in your taxable estate. An irrevocable life insurance trust (ILIT) can keep the proceeds out of your taxable estate.

For California-specific property tax planning, consult with a tax professional about strategies to minimize reassessment impacts on heirs.

Frequently Asked Questions

Does California have an inheritance tax in 2024?

No. California has not had an inheritance tax since 2005. The state does not tax inheritances at the state level. However, federal estate taxes may apply to very large estates.

What’s the difference between an inheritance tax and an estate tax?

An inheritance tax is paid by beneficiaries based on what they receive. An estate tax is paid by the estate itself based on the total value of assets. California has neither. The federal government has an estate tax, not an inheritance tax.

If I inherit property in California, do I have to pay taxes on it?

You don’t pay income tax on the inherited property itself. However, the county may reassess the property for property tax purposes, potentially increasing your annual property taxes. Additionally, any income the property generates (like rental income) is taxable.

Will I owe capital gains tax on inherited stock?

No, not immediately. Inherited stock receives a step-up in basis, meaning your cost basis becomes the fair market value on the date of death. If you sell immediately, you owe no capital gains tax. If you hold it and it appreciates further, you’d owe tax on the new appreciation.

Do I need to file taxes on an inheritance I received?

The inheritance itself doesn’t require a tax return. However, if the inherited assets generate income (interest, dividends, rental income), you must report that income on your tax return.

What happens if the estate owes federal estate tax?

The estate’s executor pays federal estate tax from estate assets before distributing inheritances to beneficiaries. Individual heirs don’t pay the estate tax; they receive their inheritance after the tax is paid.

Can I claim funeral expenses as a tax deduction?

Funeral expenses are generally not deductible on your personal income tax return. However, the estate may be able to deduct reasonable funeral expenses before calculating the taxable estate, which can reduce federal estate tax.

What’s the parent-to-child property tax exclusion in California?

California allows a $1 million exclusion on property value when you inherit from a parent or grandparent. This means the first $1 million of the property’s value is not reassessed for property tax purposes. You must file the proper claim with your county assessor.

Bottom Line: California Inheritance Tax Status

California doesn’t have an inheritance tax, and that’s good news for heirs. But don’t let that make you complacent about taxes entirely. The federal government still has an estate tax (though it rarely applies), and various income taxes apply to earnings from inherited assets.

If you’re inheriting significant assets in California, especially real estate, work with a tax professional or estate planning attorney to understand your specific situation. The step-up in basis alone can save you tens of thousands in capital gains taxes, but you need to understand how it applies to your inheritance.

If you’re doing the planning, use the strategies above to minimize what your California heirs will owe. With proper planning, you can significantly reduce the tax burden on the people you love.