California has no estate tax and no inheritance tax. Nothing is owed to the state simply because someone died or because you received an inheritance, and the California Franchise Tax Board confirms that gifts and inheritances are not included in a recipient’s state income.1Franchise Tax Board. Gifts and Inheritance Several other taxes and costs can still apply, though, and a few of them catch California families badly off guard. Here is what actually hits an estate or an heir in this state.
The Federal Estate Tax Still Applies to Large Estates
The federal government taxes estates even though California does not. For 2026, the basic exclusion amount is $15 million per individual.2Internal Revenue Service. What’s New – Estate and Gift Tax Every dollar above that threshold is taxed at graduated rates reaching 40 percent, calculated against the entire taxable estate worldwide.
This exemption had been scheduled to drop roughly in half when the Tax Cuts and Jobs Act provisions expired at the end of 2025. Congress eliminated that sunset by passing the One Big Beautiful Bill Act, which made the $15 million exemption permanent and indexed it to inflation.
Portability for Married Couples
Married couples can effectively shield up to $30 million from federal estate tax through portability. When the first spouse dies, any unused portion of their $15 million exemption transfers to the surviving spouse, but only if the executor files a federal estate tax return (Form 706) and makes the portability election on that return.3GovInfo. 26 USC 2010 – Unified Credit Against Estate Tax This is where families trip up. If the first spouse’s estate is well below the filing threshold, nobody thinks a return is needed, and the unused exemption quietly disappears.
For estates that are not otherwise required to file, the IRS allows a simplified late portability election. Under Revenue Procedure 2022-32, the executor can file Form 706 up to five years after the date of death, noting at the top of the return that it is filed to elect portability.4Internal Revenue Service. Revenue Procedure 2022-32 Miss that five-year window and the exemption is lost permanently.
Property Tax Reassessment Under Proposition 19
Inheriting a home in California does not trigger estate or inheritance tax, but it can trigger a sharp property tax increase. Since February 16, 2021, Proposition 19 has required reassessment of inherited real estate to current market value unless the heir meets specific conditions.5California Board of Equalization. Proposition 19 – The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act
To keep the parent’s lower property tax base, you must use the inherited home as your primary residence and file for the homeowner’s exemption within one year of the transfer.6California State Board of Equalization. Proposition 19 Fact Sheet Even then, the exclusion is capped. The home’s current market value cannot exceed the original assessed value (the factored base year value) plus an inflation-adjusted amount. For transfers between February 16, 2025, and February 15, 2027, that amount is $1,044,586.7California Board of Equalization. BOE Adjusts the Proposition 19 $1 Million Intergenerational Transfer Exclusion If the market value exceeds the base plus that cap, the difference gets added to the new assessed value.
Inherited investment properties and vacation homes get no exclusion under Proposition 19 at all. They are reassessed to full market value regardless of whether the heir keeps or sells. For families in neighborhoods where values have climbed for decades, the jump from a long-held assessed value to today’s market value can mean property tax bills that triple or quadruple in one cycle.
Capital Gains and the Step-Up in Basis
When you inherit an asset like real estate or stock, its tax basis resets to the fair market value as of the date the original owner died.8Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If your parent bought a home for $200,000 and it was worth $1.2 million when they died, your basis is $1.2 million. Sell it the next month for $1.2 million and you owe zero capital gains tax. Only appreciation after the date of death is taxable when you later sell.
California taxes capital gains as ordinary income with no preferential rate, so the state portion of the bill can be significant. For 2026, California’s top marginal income tax rate is 13.3 percent, stacked on top of federal capital gains rates. The step-up in basis is the single biggest tool keeping that combined bill manageable.
The Community Property Double Step-Up
California is a community property state, which creates a tax benefit most other states do not offer. When one spouse dies, both halves of any community property receive a stepped-up basis, not just the deceased spouse’s half.8Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent In a common-law state, only the decedent’s 50 percent interest gets the step-up; the surviving spouse’s half keeps its original basis.
Take a couple who bought a home decades ago for $300,000 that is now worth $2 million. In a common-law state, one spouse’s death wipes out only $850,000 of the gain, as that spouse’s half goes from $150,000 to $1 million. In California, both halves reset to $1 million each, erasing the entire $1.7 million of gain. If the surviving spouse sells shortly after, the capital gains tax is essentially zero. This is one of the most valuable and least understood tax benefits available to California couples.
Income Tax on Inherited Retirement Accounts
The inheritance itself is not taxed, but distributions from inherited traditional IRAs and 401(k) plans are treated as ordinary income at both the federal and state level. The money was never taxed going in, so the tax hits when it comes out. California follows federal rules and taxes the distributions at the recipient’s marginal rate.
Most non-spouse beneficiaries who inherited a retirement account after 2019 must empty it within 10 years of the original owner’s death. That window can push large distributions into high-earning years if you are not careful about timing. Inherited Roth IRAs follow the same 10-year distribution timeline but are generally not taxable because the original contributions were made with after-tax dollars.
California’s Statutory Probate Fees
California is one of the few states that sets probate attorney and executor fees by statute rather than letting families negotiate. Both the attorney and the executor are each entitled to compensation based on the gross value of the estate, calculated on a sliding scale:9California Legislative Information. California Probate Code 10810
- First $100,000: 4 percent
- Next $100,000: 3 percent
- Next $800,000: 2 percent
- Next $9,000,000: 1 percent
- Next $15,000,000: 0.5 percent
- Above $25,000,000: a reasonable amount determined by the court
The fee is based on gross estate value, meaning it includes the full appraised value of real estate before any mortgage is subtracted. A home worth $1.5 million with $500,000 still owed generates fees based on $1.5 million, not $1 million. For a $2 million estate, the statutory fee for the attorney alone is $31,000, and the executor collects the same amount, for a combined $62,000 before court costs or extraordinary-service fees. California imposes no estate tax, but these probate costs are the closest thing to one that most families actually encounter.
Inheriting From a State That Does Have an Inheritance Tax
California has no inheritance tax, but five states do: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The tax is generally owed to the state where the deceased person lived, not where the heir lives. If your aunt was a Pennsylvania resident and left you $200,000, Pennsylvania may impose its inheritance tax on that bequest even though you live in California. The rate and any exemptions depend on your relationship to the deceased and that state’s laws. California residents often assume no inheritance tax applies anywhere in their situation, so this one is worth checking if someone close to you lives in one of those five states.