California Inheritance Tax and Tax Exemptions

Randy Warshawsky, an Enrolled Agent and tax professional, discusses California inheritance tax, tax exemptions, and potential tax consequences when someone inherits property.

Randy established his tax practice in 1986 and shares his experience helping individuals understand inheritance-related tax matters.

For professional tax guidance, Randy may be reached at 408-445-1151 or through The Tax Man.

Does California Have An Inheritance Tax?

The answer is no. California previously had a state estate tax connected to the federal estate tax credit, but that tax no longer applies.

However, inheriting property can have other tax consequences, particularly if you sell the property, rent it out, or inherit certain retirement accounts.

If you inherit real estate, the property’s income tax basis is generally adjusted to its fair market value as of the deceased owner’s date of death. In some circumstances, an alternative valuation date or special basis rules may apply.

If you later sell the property, any taxable capital gain is generally calculated using the sale proceeds, adjusted basis, and applicable selling expenses. If you rent the property, you may have rental income, deductible expenses, depreciation, and additional tax reporting obligations.

The deceased person may also need a final individual income tax return, depending on their income and filing requirements for the year of death.

An estate or trust may have separate income tax filing obligations. For example, a domestic estate generally must file a federal fiduciary income tax return if it has gross income of $600 or more during the tax year. Trust filing requirements differ and may apply even when income is below that amount.

Whether a return is required depends on the circumstances, including the type of entity, its income, and applicable federal and California filing rules.

From the beneficiary’s perspective, the tax treatment of inherited property generally depends more on the type of asset and applicable tax laws than on whether the property passed through probate, a trust, or intestate succession.

Some inherited assets have special tax treatment. Traditional IRAs and other tax-deferred retirement accounts, for example, generally produce taxable income when distributions are received. Different rules may apply to Roth accounts and other retirement benefits.

For inherited real estate, establishing an accurate date-of-death valuation is particularly important. That valuation may affect the amount of taxable gain when the property is eventually sold.

Tax laws are complicated, and the details matter. There are situations where the rules are straightforward and others where careful analysis is necessary.

Throughout my career, I have reviewed tax returns prepared by other professionals and seen the importance of keeping up with changes in tax law.

At the time of this interview, the major federal tax changes taking effect for the 2018 tax year were an important consideration. Tax laws have continued to change since then, so anyone dealing with an inheritance should obtain guidance based on the rules applicable to their circumstances.

For many people, receiving an inheritance is an unfamiliar experience. Working with a knowledgeable tax professional can help ensure that reporting obligations are addressed and available tax benefits are properly considered.

Does a Deceased Person’s Estate Owe Federal Estate Tax?

California does not impose a state inheritance tax or a separate state estate tax. However, a deceased person’s estate may be subject to federal estate tax.

Federal estate tax generally applies when the value of the taxable estate exceeds the available federal estate tax exemption, after applicable deductions and credits.

The federal exemption is substantial, so most estates do not owe federal estate tax.

Beneficiaries and heirs generally do not pay federal income tax simply because they receive an inheritance. However, certain inherited assets, including traditional retirement accounts, may have income tax consequences.

Federal Estate Tax Exemptions

Federal estate tax exemptions, tax rates, and applicable rules can change. The exemption available to an estate depends on the law in effect at the time of death and the estate’s circumstances.

Special provisions may apply to married couples, including the portability of a deceased spouse’s unused federal estate tax exclusion when the applicable requirements are met.

When federal estate tax is owed, it is generally an obligation of the estate rather than a tax imposed directly on beneficiaries simply for receiving an inheritance.

Consult a qualified estate planning attorney or tax professional to determine whether federal estate tax reporting or payment requirements apply.

Because the federal exemption is substantial, relatively few estates are subject to federal estate tax.

Can Inherited Property Be Subject to Other Taxes?

Although California does not impose an inheritance tax, other states may impose inheritance taxes on certain beneficiaries.

If you inherit property from someone who lived in another state, or inherit property located outside California, the laws of that state may affect whether inheritance or estate taxes apply.

Not every inheritance is taxable. Tax obligations depend on the applicable state law, the relationship between the deceased person and the beneficiary, available exemptions, and other circumstances.

Consult a qualified tax professional if your inheritance involves another state.

Income Tax on Retirement Accounts

Inherited retirement accounts can have income tax consequences.

Distributions from traditional IRAs and tax-deferred 401(k) accounts are generally subject to income tax when withdrawn, although the treatment depends on the account and its circumstances.

Roth retirement accounts may receive different tax treatment, including potentially tax-free qualified distributions.

Withdrawal requirements also vary depending on the type of retirement account, the beneficiary’s relationship to the deceased person, and applicable federal tax rules.

Consult a qualified tax professional about your particular circumstances. Contact the retirement plan administrator or account custodian to understand the available distribution options and applicable deadlines.

Inheriting a Home

In Santa Clara County, property taxes are collected by the Department of Tax and Collections. Collected property taxes are apportioned to the appropriate taxing entities through the County’s financial administration.

When someone inherits real estate through a will or trust, property taxes remain due according to the County’s payment schedule. Failure to pay property taxes on time can result in penalties and additional charges.

Inheriting a home may also trigger a reassessment of its property tax value. Under California Proposition 19, certain parent-to-child and grandparent-to-grandchild transfers may qualify for an exclusion from reassessment when applicable requirements are satisfied.

If inherited real estate is sold, outstanding property taxes are generally addressed through the title and escrow process. Delinquent taxes may need to be paid from the sale proceeds before the transaction can close.

If you are an Executor, Administrator, or Successor Trustee responsible for selling inherited real estate in Santa Clara County, we provide specialized probate and trust real estate services. Contact us to discuss your circumstances.

Estate Plans, Living Trusts, and Taxes

Estate planning attorney Scott Carter discusses how wills, living trusts, and other estate planning strategies can help families manage the transfer of assets and address potential tax consequences.

A properly funded revocable living trust can generally help assets pass to beneficiaries without probate. However, creating a living trust does not automatically eliminate federal estate tax, income tax, or other tax obligations.

In his videos on this website, Scott discusses gift taxes, federal estate tax exemptions and credits, estate tax returns, and examples of estate planning strategies that may provide tax benefits under applicable law.

The information provided here is for general educational purposes and is not intended as legal or tax advice. Estate planning and tax laws are complex, and individual circumstances vary.

Consult an experienced California estate planning attorney and a qualified tax professional for guidance appropriate to your situation.

For additional information about inheritance rights, visit What Beneficiaries & Heirs Need to Know | Inheritance.

Santa Clara County Probate & Trust Real Estate Services

Kathleen Daniels, Broker-Owner of KD Realty and a Certified Probate Real Estate Specialist, represents Executors, Administrators, and Successor Trustees selling probate and trust real estate in Santa Clara County.

If you are responsible for selling estate real property, contact Kathleen at 408-972-1822 to discuss your circumstances and learn how her specialized real estate services can help.

For legal or tax questions, consult a qualified California attorney or tax professional.