What is the Tax on Inheritance in California?

California does not impose a state inheritance tax.

This means that if you receive money, real estate, investments, or other assets from a deceased person’s estate, you do not owe California tax simply because you inherited those assets.

Beneficiaries are not taxed on the value of the inheritance itself at the state level, regardless of the amount received.

While the absence of a California inheritance tax is a significant benefit, it does not mean inherited assets are entirely tax-free.

Other federal and state tax considerations may still apply, depending on the type of asset and how it is handled after inheritance.

Federal Estate Tax (Applies Only to Large Estates)

Although California has no estate or inheritance tax of its own, estates may still be subject to the federal estate tax. The federal estate tax exemption is $13.99 million per individual, or $27.98 million for married couples. Only the portion of an estate that exceeds these thresholds is taxed, at rates that can reach up to 40%.

Importantly, this tax is paid by the estate itself, not by the beneficiaries. Because the exemption is so high, the vast majority of estates owe no federal estate tax at all.

Income Tax on Earnings from Inherited Assets

Inherited assets are generally not treated as taxable income when received. However, any income those assets generate after inheritance is taxable at both the federal and California levels. Common examples include:

• Interest earned on inherited bank accounts or bonds
• Rental income from inherited real estate
• Dividends from inherited stocks or mutual funds
• Distributions from inherited retirement accounts, such as IRAs or 401(k)s, are typically taxed as ordinary income when withdrawn

These amounts must be reported on your annual income tax return.

Capital Gains Tax When You Sell Inherited Property

If you sell an inherited asset for more than its value at the time of inheritance, you may owe capital gains tax. However, inherited assets benefit from a valuable rule known as the “step-up in basis.”

Under this rule, the asset’s tax basis is adjusted to its fair market value on the date of the original owner’s death, rather than what the deceased originally paid for it. This often reduces—or even eliminates—capital gains tax if the asset is sold soon after it is inherited.

Property Tax Reassessment Under Proposition 19

California Proposition 19 significantly changed property tax rules for inherited real estate. If you inherit a home and do not use it as your primary residence, the property will generally be reassessed at current market value, which can result in substantially higher property taxes. Limited exclusions apply if the inherited home becomes the beneficiary’s primary residence.

Inheritances from Other States

If you are a California resident but inherit assets from someone who lived in a state that does impose an inheritance tax—such as Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania—you may still be subject to that state’s tax laws. Inheritance taxes are typically based on the deceased person’s state of residence, not the beneficiary’s.

Recommendation: File Electronically for Accuracy and Speed

If inherited assets generate income, capital gains, or retirement distributions, those amounts should be reported accurately on your tax return. Electronic filing (e-file) is recommended because it:

• Reduces calculation and reporting errors
• Automatically applies current tax rules and limits
• Speeds up processing and refunds
• Provides confirmation that your return was successfully submitted

Most tax software and professional tax preparers support electronic filing for both federal and California returns, making it the safest and most efficient way to comply with inheritance-related tax obligations.