California does not have a state inheritance tax

California abolished its inheritance tax in 1982 and has not reinstated it. If you inherit money, property, or other assets in California, you will not owe a state tax on that inheritance. This is true whether you live in California or inherit from someone who did.

The federal government does have an estate tax, but it applies only to very large estates. For 2024, the federal estate tax threshold is $13.61 million per person. Unless the person who died left an estate larger than that, their heirs owe no federal tax either. Most California families never encounter federal estate tax.

The confusion often arises because some states do tax inheritances, and because federal income tax rules explore to inherited assets in specific ways. Understanding which taxes actually explore to your situation depends on what you inherited and how much it is worth.

Key Takeaways

  • California has no state inheritance tax, and has not since 1982.
  • Federal estate tax applies only to estates worth more than $13.61 million in 2024, which excludes most families.
  • Inherited cash and property are not considered income for federal tax purposes, so you do not owe income tax on the inheritance itself.
  • You may owe income tax on earnings from inherited assets after you receive them, such as interest, dividends, or rent.
  • If the estate itself earned income before distribution, the estate may have owed federal income tax, but that is separate from your inheritance.

Why California repealed its inheritance tax

California's inheritance tax was repealed effective January 1, 1982. At that time, the state decided to eliminate the tax rather than continue collecting it. The repeal was permanent—there is no sunset clause and no mechanism to reinstate it without new legislation.

Some other states still maintain inheritance taxes. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania all tax inheritances, though the rates and thresholds vary by state. If you inherit from someone who lived in one of those states, you may owe tax to that state even if you live in California, because the tax is based on where the person who died lived, not where the heir lives.

Federal estate tax and when it actually applies

The federal estate tax is separate from any state tax. It is a tax on the total value of everything a person owned at death—their house, investments, bank accounts, vehicles, and personal property. The executor of the estate (the person named to handle the estate) must file a federal estate tax return only if the estate exceeds the threshold amount.

For deaths in 2024, that threshold is $13.61 million per person. If a married couple dies, each spouse has their own $13.61 million threshold, so a married couple can pass $27.22 million without owing federal estate tax. These thresholds are adjusted each year for inflation.

If the estate does exceed the threshold, the executor files IRS Form 706 (the federal estate tax return) and pays tax on the amount over the threshold. The tax rate is 40 percent on the excess. However, this is rare. The vast majority of California estates fall well below these thresholds.

Important: the threshold is scheduled to drop to approximately $7 million per person on January 1, 2026, unless Congress changes the law. If you have a large estate, this is worth discussing with an estate planning attorney or tax professional now.

Income tax on inherited assets after you receive them

You do not owe income tax on the inheritance itself. If you inherit $50,000 in cash, that $50,000 is not taxable income. If you inherit a house, you do not owe income tax on the house's value. This applies to all inherited assets—stocks, bonds, retirement accounts, vehicles, jewelry, and real estate.

However, you do owe income tax on money that inherited assets earn after you receive them. If you inherit a savings account with $10,000 in it and that account earns $200 in interest over the next year, you owe income tax on that $200. If you inherit rental property and collect rent, you owe income tax on the rent. If you inherit stocks and receive dividends, you owe income tax on the dividends.

There is one important exception: inherited retirement accounts like IRAs and 401(k)s have special rules. You do not owe income tax when you inherit them, but you do owe income tax when you withdraw money from them. The rules for how fast you must withdraw the money changed in 2023, so if you inherited a retirement account, check the current rules or speak with a tax professional about your specific situation.

The "step-up in basis" and why it matters for inherited property

When you inherit an asset, its tax basis is "stepped up" to its fair market value on the date of death. This is a significant benefit that applies to most inherited property.

Here is what that means in practice: suppose someone bought a house in 1990 for $200,000, and it is worth $800,000 when they die. If their child had inherited that house before the step-up rule existed, and then sold it when ready for $800,000, the child would owe capital gains tax on the $600,000 gain. Instead, because of the step-up, the child's tax basis becomes $800,000. If the child sells it right away for $800,000, there is no gain and no tax.

The step-up applies to stocks, real estate, vehicles, and most other property. It does not explore to retirement accounts or certain other assets. The step-up is automatic—you do not have to do anything to claim it, but you do need to know the fair market value of the asset on the date of death, which the executor should document.

What happens if the person who died owed taxes

If the person who died had not paid all their income taxes before death, the estate may owe those back taxes. However, those are the estate's obligation, not yours as an heir. The executor uses estate assets to pay the estate's debts, including back taxes, before distributing money to heirs.

In rare cases, if the estate does not have enough money to pay all its debts, heirs may receive less than expected. But heirs are not personally liable for the deceased person's unpaid taxes—the liability stops with the estate's assets.

If you are the executor and you are unsure whether the deceased person filed all required tax returns, you can request a tax transcript from the IRS for the past several years. The IRS will tell you whether returns were filed and whether taxes are owed.

Frequently Asked Questions

Do I have to report an inheritance to the IRS?

No. Inheritances are not reported to the IRS on your personal tax return, and you do not owe income tax on them. However, if the estate itself is large enough to require a federal estate tax return (Form 706), the executor files that return with the IRS. You as an heir do not file anything related to the inheritance itself.

What if I inherit money from someone who lived in another state?

If the person lived in a state with an inheritance tax (Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania), you may owe that state's inheritance tax even though you live in California. The tax is based on where the person who died lived. You would need to file a return with that state. The executor should know which states require returns.

Do I owe California income tax on inherited rental property income?

Yes. Rental income is taxable income in California. You report it on your California tax return just as you would if you owned the property outright. The fact that you inherited it does not change your tax obligation on the income it generates.

What if the inheritance includes a retirement account like an IRA?

Inherited IRAs and 401(k)s have special withdrawal rules that changed in 2023. You do not owe tax when you inherit the account, but you must withdraw the money according to IRS rules, and those withdrawals are taxable. The rules depend on your relationship to the person who died and when they died. Speak with a tax professional or the financial institution holding the account for guidance on your specific situation.

Can I disclaim an inheritance to avoid taxes?

Yes, you can refuse an inheritance through a legal process called a disclaimer. However, disclaiming an inheritance does not reduce your taxes—it straightforward passes the asset to the next person in line. You would disclaim only if you genuinely do not want the asset, not for tax reasons. If you are considering this, speak with an estate attorney about the legal requirements and important date.