Does California Have an Inheritance Tax? What Heirs Owe

Does California Have an Inheritance Tax or Estate Tax?

No. California has no inheritance tax, no estate tax, and no death tax at the state level. As of 2024 and 2025, California is one of 38 states that does not impose any form of state death tax on its residents or their heirs.

This means that when a California resident passes away, their estate owes nothing to the State of California based on the transfer of assets. Heirs receiving property, money, or investments from a California decedent owe no state tax on the inheritance itself.

California did have an inheritance tax historically. The state first enacted one in 1893, and it remained in various forms for decades. However, the state-level estate and inheritance taxes were eventually repealed, and California has had no such tax in modern practice.

While the state picture is straightforward, several other taxes can still apply to inherited assets:

• Federal estate tax on estates exceeding the exemption threshold
• Capital gains tax if you sell inherited assets that have appreciated since the date of death
• Property tax reassessment under Proposition 19 for inherited real estate
• Income tax on distributions from inherited retirement accounts like IRAs and 401(k)s

Each of these has its own rules, thresholds, and exemptions, which we'll cover below.

Estate Tax vs. Inheritance Tax: Who Actually Pays

An estate tax and an inheritance tax are two different things, even though people often use the terms interchangeably. The distinction matters because it determines who writes the check.

An estate tax is levied on the total value of a deceased person's estate before assets are distributed to beneficiaries. The estate itself pays the tax, meaning it comes out of the pot before heirs receive anything. The federal government imposes an estate tax, but California does not.

An inheritance tax is paid by the individual beneficiary on the assets they receive. The tax rate often depends on the heir's relationship to the deceased. California does not impose this tax either, and there is no federal inheritance tax.

Six states still impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland is the only state that has both an estate tax and an inheritance tax.

If you inherit from someone who lived in one of those six states, or if the deceased owned property there, you may owe inheritance tax to that state even though you live in California. Always verify the tax rules in the state where the decedent resided or owned property.

Federal Estate Tax Thresholds California Heirs Should Know

The federal estate tax is the one death-related tax that can still apply to California estates, but it only hits very large ones. For tax year 2024, the federal exemption is $13.61 million per individual. For 2025, that exemption rose to $13.99 million per individual. Estates valued below these amounts owe zero federal estate tax.

Married couples can effectively double the exemption through portability under IRC §2010(c). By filing a timely estate tax return when the first spouse dies, the surviving spouse can use both exemptions. For 2025, that means a married couple can pass up to $27.98 million without any federal estate tax.

When an estate does exceed the exemption, the federal government applies a graduated rate structure ranging from 18% to 40%. The top 40% rate applies to the largest taxable amounts above the exemption.

Here's what's important to watch: the current elevated exemption amounts exist because of the Tax Cuts and Jobs Act (TCJA) of 2017, which roughly doubled the previous thresholds. That provision is scheduled to sunset after 2025, potentially dropping the exemption to approximately $7 million per individual unless Congress acts to extend it. If you're planning around a large estate, verifying the current year's exemption with the IRS is essential.

One more point that often confuses heirs: the estate pays the federal estate tax before distributing assets to beneficiaries. As an heir, you don't receive a bill from the IRS for estate tax. The executor or trustee handles that obligation from estate funds.

Capital Gains and Step-Up in Basis on Inherited Property

Inheriting an asset doesn't trigger income tax. But selling that asset can, because any appreciation after the date of death is subject to capital gains tax. The good news is that a rule called the "step-up in basis" usually reduces or eliminates this tax significantly.

When you inherit property, its tax basis "steps up" to the fair market value on the date of death. That means you only owe capital gains tax on the increase in value from the date you inherited it, not from when the original owner purchased it.

Here's a concrete example:

• Your parent bought a home for $200,000
• At the time of their passing, the home is worth $900,000
• You inherit the home, and your new tax basis is $900,000 (the stepped-up value)
• If you sell for $910,000, your taxable gain is only $10,000, not $710,000

This step-up in basis generally applies whether the property passes by will, through probate, or via a revocable living trust. It's one of the most significant tax benefits available to heirs.

If you hold the inherited property and it appreciates further before you sell, you'll owe capital gains tax on that post-inheritance appreciation. If the property has declined in value since the date of death, you could potentially claim a capital loss.

Inherited Retirement Accounts

Inherited IRAs and 401(k)s work differently. These accounts don't get a step-up in basis. Instead, distributions from inherited traditional IRAs and 401(k)s are generally taxed as ordinary income when you withdraw them.

Spouses who inherit a retirement account can often roll it over into their own IRA and continue deferring taxes. Non-spouse beneficiaries, however, are typically required to distribute the entire account within 10 years under the SECURE Act. Each distribution is taxable income for both federal and California state income tax purposes.

Prop 19 and Property Tax Reassessment on Inherited Homes

Even though California doesn't tax inheritance, inheriting real estate can lead to a significant increase in your annual property taxes. This is where Proposition 19 comes in.

Before Proposition 19 took effect in February 2021, California's Proposition 13 framework allowed parents to transfer their primary residence (and up to $1 million in other real property) to children without triggering a reassessment of the property's taxable value. This meant children could inherit a home and keep their parents' low assessed value, sometimes paying property taxes based on a valuation from decades earlier.

Proposition 19 significantly narrowed this benefit. Under the current rules:

• A parent-to-child transfer of a primary residence can keep the parent's assessed value only if the child uses the home as their own primary residence
• If the home's current market value exceeds the assessed value by more than $1 million, the assessed value is adjusted upward (though not to full market value)
• Transfers of non-primary-residence properties (rental homes, vacation properties, commercial real estate) no longer qualify for the parent-child exclusion and will be reassessed at current market value

This is an annual property tax issue, completely separate from income tax or estate tax. A home that was assessed at $150,000 under Proposition 13 could be reassessed at its current market value of $1.2 million, potentially multiplying the annual property tax bill.

If you're inheriting California real estate, confirm the current reassessment exemptions and filing requirements with your county assessor's office. The rules involve specific deadlines for claiming the primary residence exclusion, and missing them can mean losing the benefit entirely.

How California Inheritance Laws Treat a Spouse

California is a community property state, which creates important distinctions for married couples when one spouse inherits assets.

Community property generally includes most assets acquired by either spouse during the marriage, regardless of whose name is on the title. Separate property includes assets owned before marriage, received as a gift or inheritance during marriage, or earned after a legal separation.

This distinction matters: assets you receive as an inheritance during your marriage are classified as your separate property under California law. Your spouse does not automatically have a claim to them.

However, separate property can lose its classification if it gets mixed with community assets. This process, called commingling, is one of the most common ways inherited assets become community property. To keep an inheritance separate:

• Maintain separate accounts. Deposit inherited funds into a bank or investment account held in your name alone, not a joint account.
• Don't use community funds to maintain, improve, or pay taxes on inherited property without careful documentation.
• Keep records. Retain documentation of the inheritance, including trust or probate paperwork, to establish the asset's origin.
• Title assets clearly. If you inherit real estate, keep it titled in your name alone rather than adding your spouse to the deed.

When a spouse passes away, what happens to property depends on whether there's a valid will or trust. The deceased spouse's share of community property passes according to the will or trust (or under California's intestacy laws if there's no plan in place). Separate property may be divided among the surviving spouse, children, and other relatives, depending on family circumstances.

For couples who want clarity about how inherited assets will be treated, a marital agreement (prenuptial or postnuptial) can outline expectations in writing. An estate planning attorney can help both spouses create an arrangement that reflects their shared goals.

Next Steps for California Heirs and Executors

Here's a practical checklist for anyone inheriting assets in California or managing a California estate:

1. Confirm no state tax is due. California imposes no inheritance or estate tax. You can cross that off your list.
2. Check the federal estate tax threshold. If the estate's total value exceeds the current federal exemption ($13.99 million per individual for 2025), the executor will need to file a federal estate tax return and pay any tax owed before distributing assets.
3. Plan for capital gains on any sale. If you intend to sell inherited assets, understand the stepped-up basis so you can estimate your potential tax liability. Consider timing and consult a tax professional for high-value assets.
4. Review the Prop 19 impact on inherited real estate. Determine whether you plan to use inherited property as your primary residence. If not, expect a property tax reassessment. File any applicable exclusion claims with the county assessor within the required deadlines.
5. Address inherited retirement accounts. Understand the distribution requirements and tax implications for inherited IRAs and 401(k)s, especially the 10-year rule for non-spouse beneficiaries.
6. Check other states' rules. If the deceased lived in another state or owned property in a state with an inheritance or estate tax (like Pennsylvania, New York, or Washington), you may have obligations in that jurisdiction.

For straightforward inheritances of modest size, many heirs can handle the process without extensive professional help. But consulting an estate planning attorney or tax advisor makes sense when the estate is large enough to potentially trigger federal estate tax, when real estate is involved and Prop 19 implications are unclear, when the estate includes complex assets like business interests or out-of-state property, or when there are disputes among beneficiaries.

Estate planning tools like trusts, wills, and gifting strategies can create clarity for the whole family. They're not required for every situation, but for families with significant assets or complex circumstances, they help ensure everyone understands the plan and that wealth transfers happen as intended.