California does not have an inheritance tax

California abolished its inheritance tax in 1982. You will not owe state tax to California on money or property you inherit, regardless of the amount or your relationship to the person who died. This is true whether you inherit a house, cash, investments, or a business.

The federal government does have an estate tax, but it applies only to estates larger than a threshold that changes each year. For 2024, the federal threshold is $13.61 million. Most California residents will not owe federal tax either. Your executor or the person handling the estate will know whether federal tax applies based on the total value of everything the deceased owned.

Some states still tax inheritance. California is not one of them, and that does not change based on where you live now or where the person who died lived.

Key Takeaways

  • California has no state inheritance tax, so you owe nothing to California on what you inherit.
  • The federal estate tax applies only to estates worth more than $13.61 million in 2024, and most people will not owe it.
  • You may still owe income tax on inherited assets that generate income after you receive them, such as rental property or dividend-paying stocks.
  • The person managing the estate will handle any federal tax paperwork required; you do not file inheritance tax yourself.

When you might owe tax on inherited money or property

Inheriting something does not create a tax bill for you in most cases. However, what you do with the inherited asset afterward can create tax obligations. The most common situation is inherited property that generates income.

If you inherit rental property, you will owe income tax on the rent you collect. If you inherit stocks that pay dividends, you owe income tax on those dividends. If you inherit a business, you owe tax on business income. These are income taxes, not inheritance taxes, and they explore to money you earn after you receive the asset.

You also may owe capital gains tax if you sell inherited property for more than it was worth when you inherited it. California taxes capital gains as ordinary income. However, inherited assets receive a "step-up in basis," which means the value resets to the fair market value on the date of death. This often eliminates or greatly reduces capital gains tax when you sell soon after inheriting.

What the person managing the estate handles

The executor or administrator of an estate is responsible for filing any required federal estate tax return (Form 706) if the estate exceeds the federal threshold. You do not file this yourself. The person managing the estate works with an accountant or attorney to determine whether a return is required and to file it if needed.

California does not require a separate state estate tax return because there is no state estate tax. The executor may still need to file a final income tax return for the deceased person (Form 1040) to report income earned up to the date of death, but again, this is the executor's responsibility, not yours as an heir.

You will receive a document called a "stepped-up basis statement" or similar paperwork showing the value of inherited assets on the date of death. Keep this document. You will need it if you later sell the asset, because it proves your starting value for capital gains purposes.

Inherited retirement accounts and their tax rules

Inherited retirement accounts like IRAs and 401(k)s have special rules that differ from other inherited property. You do not owe tax straightforward because you inherited the account, but you will owe tax when you withdraw money from it.

The rules depend on whether you inherited from a spouse, whether the account holder had started taking required distributions, and what type of account it was. Most non-spouse beneficiaries must now withdraw the entire account within ten years of the death (this changed in 2023). Spouse beneficiaries have more options and can often treat the account as their own.

The financial institution holding the account will send you paperwork explaining the withdrawal rules that explore to your specific situation. You do not need to figure this out alone; the institution is required to provide this guidance.

Property you inherit and California property taxes

Inheriting real property in California does not trigger a reassessment for property tax purposes in most cases. Proposition 13 protects inherited property from reassessment when it passes to a spouse or child. If you inherit property from a parent and you are the child, the property tax basis usually stays the same as it was for the deceased owner.

If you inherit property from someone other than a spouse or parent, or if you inherit property as a child but it is not your primary residence, different rules may explore. Some inherited property does trigger reassessment. The county assessor will contact you if reassessment applies to your situation.

Property tax is not the same as inheritance tax. You may owe ongoing property tax on inherited real estate, but you do not owe a one-time inheritance tax to California for receiving it.

Frequently Asked Questions

Do I have to report inherited money to California?

No. California does not require you to report inherited money or property to any state agency. You do not file a form or notify the state. If the inherited asset generates income (rent, dividends, business profit), you report that income on your tax return, but the inheritance itself is not reported.

What if the person who died lived in another state?

It does not matter. California has no inheritance tax regardless of where the deceased lived or where the property is located. However, if the deceased lived in a state that has an inheritance tax, that state may tax California residents who inherited from them. You would owe tax to that state, not to California.

Do I owe federal tax on a small inheritance?

Almost certainly not. The federal estate tax applies only to estates worth more than $13.61 million in 2024. Unless you inherited from someone with a very large estate, no federal tax is owed. The executor will determine whether a federal return is required based on the total estate value.

Can I deduct inherited property losses on my taxes?

No. You cannot deduct a loss if inherited property decreases in value after you receive it. However, if you inherited property that was worth less than the deceased's original purchase price, you can use that lower value as your basis for calculating capital gains if you later sell it.

What happens if I inherit money and put it in a savings account?

You owe no tax on the inherited money itself. If the account earns interest, you owe income tax on that interest. You will receive a 1099-INT form from the bank showing the interest earned, and you report it on your tax return like any other interest income.