California does not have a state estate tax

California abolished its state estate tax in 2005. If you are inheriting property or money in California, you will not owe a state-level estate tax on that inheritance, regardless of how large the estate is. This is one of the most straightforward tax rules in the state — there is no California estate tax to pay.

However, the absence of a state estate tax does not mean estates are tax-free everywhere. The federal government still collects an estate tax on very large estates, and some of the money you inherit might be subject to income tax depending on what it is. Understanding which taxes actually explore to your situation requires knowing the difference between these different types of taxes and who owes them.

Key Takeaways

  • California has no state estate tax, so inheriting property or money in California carries no state estate tax burden.
  • The federal estate tax applies only to estates worth more than $13.61 million in 2024, and that threshold changes yearly.
  • Inherited property itself is not taxed as income to the person who receives it, but income generated by inherited assets after you receive them is taxable.
  • You may owe federal income tax on inherited retirement accounts like IRAs or 401(k)s, depending on the account type and when distributions are taken.

Federal estate tax still applies to very large estates

Even though California has no state estate tax, the federal government does tax large estates. In 2024, the federal estate tax applies only to estates worth more than $13.61 million. This threshold is called the federal exemption amount, and it changes every year based on inflation.

If an estate is smaller than the exemption amount, no federal estate tax is owed at all. If it is larger, only the amount above the threshold is taxed, and the tax rate is 40 percent on that excess. For example, an estate worth $15 million in 2024 would owe federal tax only on the $1.39 million above the exemption — not on the entire $15 million.

The exemption amount is set to drop significantly after 2025 unless Congress changes the law. Starting in 2026, the exemption is scheduled to fall to roughly $7 million per person, adjusted for inflation. This means more estates could become subject to federal tax in the future, though most California residents will still fall below the threshold.

Inherited money and property are not taxed as income

When you inherit cash, real estate, stocks, or other property, you do not report that inheritance as income on your federal or state tax return. The value of what you inherit is not subject to income tax, even if the estate itself was large enough to owe federal estate tax.

This applies whether you inherit from a California resident or someone in another state. The person who died (or their estate) may have owed federal estate tax, but you as the inheritor do not owe income tax on the inheritance itself. This is true regardless of whether you are a family member or an unrelated beneficiary.

Inherited retirement accounts have different tax rules

Inherited IRAs, 401(k)s, and other retirement accounts are treated differently from other inherited property. You do not owe income tax when you inherit the account, but you will owe income tax when you withdraw money from it. The tax is paid on the distributions you take, not on the account balance itself.

The rules for how quickly you must withdraw money depend on the type of account and your relationship to the person who died. Spouses can roll inherited IRAs into their own accounts and delay withdrawals. Non-spouse beneficiaries generally must withdraw the entire balance within 10 years under current federal rules, though some accounts have different timelines.

If you inherit a Roth IRA, the same withdrawal timeline applies, but the distributions are usually tax-free because Roth contributions were made with after-tax dollars. Traditional IRA distributions are taxed as ordinary income. Consult a tax professional or the financial institution holding the account for the specific withdrawal schedule that applies to your situation.

Capital gains tax on inherited assets after you receive them

Inherited property receives what is called a "step-up in basis." This means the value of the property is reset to its fair market value on the date of death. If you inherit a house worth $500,000 on the date the owner died, your basis in that house is $500,000, even if the original owner paid $200,000 for it decades earlier.

Because of this step-up, you will not owe capital gains tax on the increase in value that happened before you inherited the property. However, if the property increases in value after you inherit it and you later sell it, you will owe capital gains tax on that new increase. California taxes capital gains as ordinary income, so the rate depends on your overall income for the year.

For example, if you inherit a house with a stepped-up basis of $500,000 and sell it two years later for $550,000, you owe capital gains tax on the $50,000 gain. You do not owe tax on the $300,000 increase that happened before you inherited it.

What happens if the person who died lived outside California

If you are inheriting from someone who lived in another state, California still has no state estate tax to pay. Your inheritance is not subject to California estate tax straightforward because you live in California or because the property is located in California.

However, the state where the person died may have had a state estate tax. Some states including Massachusetts, New York, and Oregon collect their own estate taxes on residents' estates. If the person who died was a resident of one of those states, their estate may have owed that state's estate tax, though that would not affect what you owe as the inheritor.

The federal estate tax rules explore the same way regardless of which state the person lived in or where you live now. Only the federal exemption amount and federal tax rate matter for federal purposes.

Frequently Asked Questions

Do I have to pay California estate tax on an inheritance?

No. California has no state estate tax. You will not owe any state-level tax on money or property you inherit, regardless of the size of the estate or your relationship to the person who died.

Will I owe federal estate tax on what I inherit?

Only if the total estate is larger than the federal exemption amount, which is $13.61 million in 2024. Even then, you as the inheritor do not pay the tax — the estate itself does before distributing money to beneficiaries. Most California residents will not be affected by federal estate tax.

What if I inherit a house — do I owe capital gains tax?

Not on the value increase before you inherited it, because of the step-up in basis. If the house increases in value after you inherit it and you sell it later, you will owe capital gains tax on that new increase only.

Are inherited retirement accounts taxed differently?

Yes. You do not owe tax when you inherit an IRA or 401(k), but you owe income tax on withdrawals you take from it. The withdrawal timeline depends on the account type and your relationship to the account owner. Consult the financial institution or a tax professional for your specific situation.

What if the person who died lived in another state?

California still has no state estate tax on your inheritance. The other state may have had its own estate tax, but that does not affect what you owe to California. Federal estate tax rules are the same regardless of which state the person lived in.