There is no estate tax in California, and no inheritance tax either. The state banned both in 1982, and the prohibition still stands under Revenue and Taxation Code Section 13301.1California Legislative Information. California Code Revenue and Taxation Code 13301 – Imposition of Tax What California heirs actually need to watch are three different things: the federal estate tax on estates above $15 million, property tax reassessment when real estate changes hands, and income tax on anything the estate earns while it is being settled.
What California Does Not Tax
Section 13301 bars the state and every local government from collecting any tax on gifts, estates, or inheritances. The ban applies regardless of the estate’s size or the heir’s relationship to the deceased. A spouse, a child, a friend, a charity — all take their inheritance free of any California tax on the transfer itself. The Franchise Tax Board confirms that gifts and inheritances are not counted as income on a California return.2Franchise Tax Board. Gifts and Inheritance
One boundary worth naming. California’s silence protects you from California tax. It does not protect you from another state’s inheritance tax if you inherit from someone who lived there. Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania still impose inheritance taxes, and those taxes can apply based on where the decedent lived, not where you live. If a Pennsylvania aunt leaves you money, Pennsylvania may want its share even if you have never left Los Angeles.
Federal Estate Tax in 2026
Federal tax is where a large California estate can owe real money. The One Big Beautiful Bill Act, signed on July 4, 2025, set the basic exclusion amount at $15 million per individual for 2026, with inflation adjustments starting in 2027.3Internal Revenue Service. What’s New – Estate and Gift Tax The increase is permanent. Estates below $15 million owe no federal estate tax. Estates above pay up to 40 percent on the excess.4Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax
A single Californian who dies in 2026 with a $20 million estate would see $5 million subject to the tax and a maximum federal bill of $2 million. A $14 million estate owes nothing.
Married couples can effectively double the exclusion to $30 million through portability. When the first spouse dies, the executor files a federal estate tax return and elects to transfer any unused exclusion to the survivor, who then holds both amounts.5Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax This matters even for estates well below the threshold: the portability election is only available by filing Form 706, so a surviving spouse who skips the filing loses the deceased spouse’s exclusion for good.
The gross estate includes the fair market value at date of death of real estate, bank accounts, investments, business interests, personal property, and life insurance proceeds the decedent owned.6Internal Revenue Service. Estate Tax Funeral expenses, debts, and charitable bequests come off before the tax is calculated. Form 706 is due nine months after the date of death, with a six-month extension available on request, though any estimated tax must still be paid by the original deadline to avoid interest.7Internal Revenue Service. Filing Estate and Gift Tax Returns
Property Tax Reassessment Is the Real California Issue
The tax that catches California heirs off guard is not an estate tax at all. It is property tax. Inheriting California real estate usually triggers a reassessment to current market value, and for a home that has been in the family for decades the new tax bill can be several times the old one.
Proposition 19 took effect on February 16, 2021, and tightened the parent-child exclusion sharply. Before Prop 19, parents could pass any property to their children without reassessment. Now the exclusion applies only when two conditions are both met: the property was the parent’s principal residence, and the child moves in and makes it their own principal residence within one year of the transfer.8California State Board of Equalization. Proposition 19 Rental properties, vacation homes, and commercial real estate inherited from parents are fully reassessed with no exclusion available.
Even when the home qualifies, there is a value cap. For transfers between February 16, 2025, and February 15, 2027, the new assessed value cannot exceed the existing factored base year value plus roughly $1,044,586. Any market value above that limit gets added to the assessed value.8California State Board of Equalization. Proposition 19 Family farms qualify under separate rules.
Deadlines matter. The heir must file for the homeowners’ exemption within one year of the transfer and submit the exclusion claim within three years. If the heir later moves out, the exclusion is lost and the property is reassessed to fair market value as of the date they stopped using it as a principal residence.9California Legislative Information. California Code RTC 63.2
The Step-Up in Basis Is a Big Benefit
Inherited assets get a basis adjustment to fair market value as of the date of death.10Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If your mother paid $200,000 for her house and it was worth $1.2 million the day she died, your basis is $1.2 million. Sell at that price and you owe no capital gains tax.
California is a community property state, and that produces a larger benefit for married couples than heirs in common-law states get. When one spouse dies, both halves of community property receive the step-up, not just the deceased spouse’s half.10Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent A couple who bought a home as community property for $400,000 and watched it rise to $2 million will see the surviving spouse take a $2 million basis on the whole property. In a common-law state only half would step up, leaving $200,000 of unrealized gain on the survivor’s half.
Income Tax on Estate Earnings
Once someone dies, their accounts and properties keep generating income until the estate is settled. That income is taxable to the estate as a separate entity, even though the underlying inheritance is not.
California requires the estate to file Form 541, the Fiduciary Income Tax Return, with the Franchise Tax Board when gross income exceeds $10,000 or net income exceeds $1,000 for the year.11Franchise Tax Board. 2025 Fiduciary Income 541 Tax Booklet The estate may also need to file if it has California-source income or distributes income to beneficiaries.12Franchise Tax Board. Estates and Trusts Federally, the executor files Form 1041. Estates that take a year or more to close owe these returns annually until final distribution. Missing deadlines produces penalties and interest that come out of what the beneficiaries eventually receive.
Annual Gifts as a Planning Tool
Separate from the $15 million lifetime exemption, federal law lets you give up to $19,000 per recipient in 2026 without using any lifetime exclusion and without filing a gift tax return.3Internal Revenue Service. What’s New – Estate and Gift Tax Married couples can combine their exclusions and give $38,000 per recipient each year. These gifts reduce a taxable estate dollar for dollar while staying entirely outside the gift tax reporting system, which is useful for anyone whose estate is approaching the federal threshold.