California does not have an inheritance tax

When someone dies and leaves you money or property in California, you do not owe state tax on that inheritance. California abolished its inheritance tax in 1982, and it has not been reinstated. This is different from federal estate tax, which is a separate tax that applies to very large estates — but California itself does not collect any tax based on what you inherit.

The distinction matters because people often confuse the two. Federal estate tax is owed by the person's estate (the total value of everything they owned) before money is distributed to heirs. California does not add a state layer on top of that. If you inherit a house, a car, a bank account, or anything else in California, you will not receive a bill from the state for inheriting it.

Key Takeaways

  • California has no state inheritance tax, so you owe nothing to California when you receive an inheritance.
  • Federal estate tax may still apply to very large estates, but that is a federal matter, not a California state tax.
  • You may owe income tax on inherited assets that generate income after you receive them, such as rental property or investment accounts.
  • Some inherited property receives a "step-up in basis," which can reduce capital gains tax if you sell it later.

Federal estate tax is separate from California state tax

The federal government does collect estate tax on very large estates, but this is not a California tax. In 2024, federal estate tax applies only to estates worth more than $13.61 million. Most people's estates fall well below this threshold, so federal estate tax does not apply to them either.

If a federal estate tax return is required, the executor of the estate files it with the IRS, not with California. The estate itself pays the tax before distributing money to heirs. You as an heir do not file a separate form or pay tax to inherit — the estate handles it before you receive your share.

California does not piggyback on the federal estate tax or add its own version. Some states do impose an inheritance tax or an estate tax in addition to the federal tax, but California is not one of them.

Income tax on inherited assets that produce income

While you do not owe tax on the inheritance itself, you may owe income tax on money that inherited assets generate after you receive them. If you inherit a rental property, you will owe income tax on the rent you collect. If you inherit a brokerage account, you will owe tax on dividends and interest it earns. If you inherit a business, you will owe tax on its income.

This is not a tax on the inheritance — it is income tax on the earnings from the inherited asset. You report this income on your federal and California state tax returns each year, just as you would report income from any other source. California has a state income tax, so you will owe both federal and state income tax on inherited income.

The inherited asset itself does not trigger income tax. Only the money it generates after you own it does.

Capital gains tax when you sell inherited property

If you inherit property and later sell it, you may owe capital gains tax on the profit. However, inherited property usually receives a "step-up in basis," which can significantly reduce or eliminate that tax.

Here is how it works: if someone buys a house for $300,000 and it is worth $500,000 when they die, the step-up in basis means you inherit it at the $500,000 value. If you sell it immediately for $500,000, you owe no capital gains tax because there is no profit. If you sell it later for $550,000, you owe tax only on the $50,000 gain, not on the original $200,000 increase in value.

California taxes capital gains as income, so you will owe both state and federal capital gains tax on any profit above the stepped-up basis. The rate depends on your total income for the year. This is not an inheritance tax — it is a tax on the gain when you sell — but it is worth understanding when you inherit property you plan to sell.

What documents you may need to show you inherited something

When you inherit money or property, you will typically receive documents from the executor or the probate court that prove you are the rightful heir. These might include a will, a trust document, a probate court order, or a deed showing the property transfer. Banks and investment firms will ask to see these before releasing inherited funds or transferring accounts to your name.

You do not need to file these documents with California's tax authority to prove you inherited something. The state does not track inheritances or require you to report them. However, if you later sell inherited property or earn income from it, you may need to show these documents to your tax preparer or accountant to establish the stepped-up basis or to document your ownership for tax purposes.

Keep inheritance documents in a safe place. You may need them years later if you sell the property or if there are questions about your ownership.

Other states with inheritance or estate taxes

Twelve states and the District of Columbia currently impose an inheritance tax or an estate tax. If you inherit from someone who lived in one of those states, or if you inherit property located in one of those states, you may owe tax to that state even though you live in California.

The states with inheritance taxes are Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Tennessee. The states with estate taxes are Connecticut, Delaware, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. The District of Columbia also has an estate tax.

If this applies to you, you will need to file a return in that state or with that jurisdiction. A tax professional familiar with multi-state inheritance can help you understand what you owe.

Frequently Asked Questions

Do I have to report an inheritance on my California tax return?

No. You do not report the inheritance itself on your California state income tax return. However, if the inherited asset generates income — such as rent, interest, or dividends — you must report that income. If you sell inherited property and make a profit, you must report the capital gain.

What if the person who died owed taxes?

The estate pays the deceased person's final tax bills before distributing money to heirs. You do not inherit the tax debt. However, if the estate does not have enough money to pay all debts and taxes, heirs may receive less than expected. The executor handles this, not you.

Is there a California inheritance tax if I inherit from a parent?

No. California has no inheritance tax regardless of who leaves you money or property. The relationship to the deceased person does not matter. Some states offer lower tax rates for close relatives, but California does not have an inheritance tax at any rate.

Do I owe tax if I inherit a house and live in it?

No tax on the inheritance itself. If you later sell the house, you may owe capital gains tax on any profit above the stepped-up basis. If you rent it out instead, you will owe income tax on the rent. But simply inheriting and living in the house triggers no tax.

What is the difference between an inheritance tax and an estate tax?

An inheritance tax is paid by the person who receives the money (the heir). An estate tax is paid by the estate before distribution. California has neither. Some states have one, the other, or both, but California has neither type.