California Does Not Have an Inheritance Tax
California has no state inheritance tax. When someone dies and leaves you money or property, you do not owe California state tax on that inheritance. This is true whether the person who died lived in California or owned property there.
The federal government does have an estate tax, but it only applies to very large estates. For 2024, the federal estate tax threshold is $13.61 million per person. Unless the person who died had an estate larger than that, their heirs pay no federal estate tax either. Most California families never encounter this tax.
Some states do tax inheritances or estates, but California is not one of them. This means you keep what you inherit without a state tax bill attached to it.
Key Takeaways
- California has no state inheritance tax, so you owe nothing to California when you inherit money or property.
- The federal estate tax only applies to estates worth more than $13.61 million in 2024, which affects very few families.
- Some states tax inheritances, but California does not, making it one of the more favorable states for heirs.
- You may still owe income tax on inherited assets that generate income after you receive them, such as rental property or investment accounts.
How Federal Estate Tax Works
The federal estate tax is separate from inheritance tax. It is a tax on the total value of everything a person owned when they died, not on what individual heirs receive. The person's estate pays this tax before money is distributed to heirs, if the estate is large enough to owe it.
For 2024, an estate must be worth more than $13.61 million for the federal government to tax it. This threshold changes each year and is scheduled to drop to around $7 million per person in 2026 unless Congress changes the law. Even then, most estates fall below the threshold and owe nothing.
If an estate does owe federal tax, the executor or administrator of the estate handles the payment. Heirs typically receive their inheritance after taxes are paid, not before.
States That Do Tax Inheritances
Twelve states and the District of Columbia have inheritance taxes or estate taxes. These are separate from California's rules and do not affect you if you live in California, but they matter if you inherit from someone who lived in one of those states.
States with inheritance taxes include Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Tennessee. States with estate taxes include Connecticut, Delaware, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Some states have both.
If you inherit from someone in one of these states, you may owe tax to that state even if you live in California. The rules vary by state and depend on your relationship to the person who died and the size of the inheritance.
Income Tax on Inherited Assets
While California does not tax the inheritance itself, you may owe California income tax on money that inherited assets produce after you receive them. For example, if you inherit a rental property, you owe California income tax on the rent you collect. If you inherit a stock portfolio, you owe tax on any dividends.
You do not owe income tax on the inherited asset's value itself—only on the income it generates going forward. This is true for both California state tax and federal income tax.
If you sell an inherited asset, you may owe capital gains tax on the profit. However, inherited assets receive a "step-up in basis," which means the value is reset to what it was worth on the date of death. This often means you owe little or no capital gains tax if you sell soon after inheriting.
What Happens If You Inherit Property in California
Inheriting real estate in California does not trigger an inheritance tax, but it may trigger a property tax reassessment. Proposition 13 generally limits property tax increases, but inherited property is reassessed at current market value when it transfers to a new owner. This can raise your property tax bill significantly.
There is a limited exception: if you inherit a home from a parent or grandparent and you are the original owner, you may be able to keep the lower property tax assessment under Proposition 19. You must meet specific requirements, including living in the home as your primary residence and meeting income limits. Contact your county assessor's office to learn whether you may have access to.
You will also need to file a change of ownership form with the county assessor within 45 days of inheriting the property. This is a requirement even though no inheritance tax is owed.
Trusts and Inheritance in California
Some people use trusts to pass assets to heirs. A trust does not change California's lack of an inheritance tax—heirs still owe nothing to California. However, trusts can affect how quickly heirs receive their inheritance and whether the estate must go through probate.
Assets in a trust pass directly to beneficiaries without probate, which is faster and more private than going through the court system. Assets outside a trust may need to go through probate, which takes longer and costs money in court fees.
Neither route creates an inheritance tax in California, but the trust route is often faster and cheaper for the heirs.
Planning Ahead for Large Estates
If you expect to inherit a very large estate or if you are planning your own estate, the federal estate tax threshold matters. Even though California has no state tax, the federal tax can take a significant portion of a very large estate.
Some people use strategies like gifting money during their lifetime, setting up trusts, or making charitable donations to reduce the size of their taxable estate. These strategies are complex and depend on your specific situation. If you are dealing with an estate worth several million dollars, talking to an estate planning attorney or tax professional can help you understand your options.
For most California families, the lack of a state inheritance tax means heirs keep what they inherit without worrying about state tax bills.
Frequently Asked Questions
Do I owe California tax when I inherit money?
No. California has no inheritance tax or estate tax. You owe nothing to California on the inheritance itself. You may owe federal estate tax only if the entire estate is worth more than $13.61 million in 2024.
What if the person who died lived in another state?
If they lived in a state with an inheritance or estate tax, you may owe tax to that state. California's lack of tax does not protect you from other states' taxes. Check the rules of the state where the person lived or owned property.
Do I owe tax on money I earn from inherited property?
Yes. You owe California income tax on rent, dividends, interest, or other income produced by inherited assets. You do not owe tax on the inherited asset's value itself, only on the income it generates after you receive it.
Will my property taxes go up if I inherit a house?
Likely yes. Inherited property is reassessed at current market value, which usually raises the property tax bill. There is a limited exception for homes inherited from parents or grandparents if you meet Proposition 19 requirements.
What is the federal estate tax threshold for 2024?
The federal estate tax applies only to estates worth more than $13.61 million per person in 2024. This threshold changes yearly and is scheduled to drop in 2026 unless Congress acts. Most estates fall below this amount and owe no federal tax.