California does not have a state estate tax
California abolished its state estate tax in 2005 and has not reinstated it. If you inherit property or money in California, you will not owe state estate tax on that inheritance, regardless of how much the estate is worth. This is one of the most significant tax breaks for heirs in the state.
However, the absence of a California estate tax does not mean estates are tax-free everywhere. The federal government still collects an estate tax, and that applies to California residents and property the same way it applies to every other state. Additionally, some heirs may face income tax on certain inherited assets depending on what they inherit and how they use it.
Understanding which taxes do and do not explore to an estate you inherit helps you plan for what you might owe and what you can keep.
Key Takeaways
- California has no state estate tax, so heirs do not owe California income tax on inherited money or property.
- The federal estate tax applies to very large estates—only those worth more than $13.61 million in 2024—so most California estates fall below the threshold.
- Inherited money itself is not taxable income, but income generated by inherited assets after you receive them may be subject to federal income tax.
- Some inherited retirement accounts and investment accounts trigger income tax when you withdraw from them, even though the inheritance itself was not taxed.
How the federal estate tax works for California residents
The federal estate tax is a tax on the total value of everything a person owned when they died. It applies to California estates the same way it applies to estates in every other state. In 2024, the federal government does not tax estates worth less than $13.61 million. This threshold changes each year and is scheduled to drop significantly after 2025.
Because the threshold is high, most California estates do not owe federal estate tax. The California Department of Tax and Fee Administration does not collect estate tax at the state level, so if your estate is below the federal threshold, you will owe no estate tax to California or the federal government.
If an estate does exceed the federal threshold, the executor or personal representative of the estate files a federal estate tax return with the IRS. The tax is paid from the estate's assets before the remaining money and property are distributed to heirs.
What happens to inherited money and property
When you inherit money or property, that inheritance itself is not considered taxable income to you under federal law or California law. You do not report it on your tax return, and you do not owe income tax on the amount you receive.
However, what you do with the inherited asset after you receive it may trigger taxes. If you inherit a house and later sell it, you may owe capital gains tax on the profit. If you inherit a traditional IRA or 401(k), you will owe income tax when you withdraw money from that account. If you inherit stocks and receive dividends, those dividends are taxable income in the year you receive them.
The key distinction is between receiving the asset (not taxed) and earning income from the asset (taxed). Understanding this difference helps you plan for taxes you might owe down the road.
Inherited retirement accounts and income tax
Inherited retirement accounts are a common source of confusion because the inheritance itself is not taxed, but withdrawals from the account are. If you inherit a traditional IRA, SEP IRA, or 401(k), the money in that account was never taxed when your relative was alive. When you withdraw it, you owe federal income tax on the withdrawal amount.
The rules for how quickly you must withdraw the money depend on your relationship to the person who died and the type of account. Spouses have different options than adult children or other beneficiaries. The IRS has specific timelines, and missing a important date can result in a penalty.
If you inherit a Roth IRA, the rules are different. Roth contributions were already taxed when they were made, so you do not owe income tax on withdrawals. However, earnings inside the Roth account may be taxable depending on how long the account has been open and when you withdraw.
Inherited investment accounts and capital gains
When you inherit stocks, bonds, mutual funds, or other investments, you receive what is called a "stepped-up basis." This means the value of the asset is reset to what it was worth on the date the person died. If the asset was worth $50,000 when your relative died and you sell it for $50,000 a week later, you owe no capital gains tax because there was no gain.
If you hold the inherited investment and its value increases, any gain above the stepped-up basis is taxable when you sell. For example, if you inherited stock worth $50,000 and sold it for $60,000, you would owe capital gains tax on the $10,000 gain. This is a federal tax, and California also taxes capital gains as ordinary income.
The stepped-up basis applies to most inherited property, including real estate, which is one reason inherited homes often have favorable tax treatment when sold shortly after inheritance.
Inherited real estate in California
Inheriting a house in California does not trigger property tax reassessment in most cases, thanks to Proposition 13. The property is generally reassessed only when it is sold or transferred to someone other than a spouse or direct descendant. This means you can inherit a house and keep it without facing a sudden spike in property taxes based on current market value.
If you sell the inherited house, you may owe capital gains tax on the profit, but the stepped-up basis usually means you owe tax only on the increase in value since the person died, not since they originally bought it. This can result in little or no capital gains tax if you sell soon after inheriting.
If you rent out the inherited house or use it as a second home, you may have other tax obligations, including depreciation deductions and rental income reporting. Consult a tax professional about your specific situation if you plan to do anything other than live in or sell the inherited property.
When you might need professional help
Most California inheritances do not require tax planning because they fall well below the federal estate tax threshold and the inherited assets themselves are not taxed. However, certain situations benefit from professional guidance: very large estates, inherited retirement accounts with complex rules, inherited businesses, inherited property you plan to rent out, or situations where the person who died had property in multiple states.
A tax professional or estate attorney can review the specific assets you inherited and explain what taxes, if any, you will owe and when. They can also help you understand important date for withdrawing from inherited retirement accounts and strategies for managing inherited property.
Frequently Asked Questions
Do I have to pay taxes on money I inherit?
No. The inheritance itself is not taxable income under California or federal law. However, income generated by inherited assets after you receive them—such as dividends, interest, or rental income—is taxable. Additionally, if you sell inherited property for more than it was worth when you inherited it, the gain is taxable.
What is the federal estate tax threshold for 2024?
The federal estate tax does not explore to estates worth less than $13.61 million in 2024. This threshold changes annually and is scheduled to decrease after 2025. Most California estates fall below this threshold and owe no federal estate tax.
If I inherit a house, do I have to pay property tax on it right away?
No. Under Proposition 13, inherited property is not automatically reassessed for property tax purposes. You pay property tax based on the previous owner's assessed value unless and until you sell the property or transfer it to someone other than a spouse or direct descendant.
Do I owe taxes when I inherit a 401(k) or IRA?
The inheritance itself is not taxed, but you will owe income tax when you withdraw money from the account. The timing and amount of required withdrawals depend on the type of account and your relationship to the person who died. Roth IRAs have different rules than traditional IRAs and 401(k)s.
What is a stepped-up basis and how does it help me?
A stepped-up basis means the value of inherited property is reset to what it was worth on the date of death. If you inherit stock worth $50,000 and sell it for $50,000, you owe no capital gains tax. You only owe tax on gains above that stepped-up value.