California has no estate tax and no inheritance tax. The state banned both in 1982, so nothing you leave behind and nothing your heirs receive is taxed by California itself.1California Legislative Information. California Code Revenue and Taxation Code 13301 – Imposition of Tax Federal estate tax is a separate matter, and it hits estates worth more than $15 million per person in 2026. Inherited real estate in California also carries its own trap: a property tax reassessment that can multiply the annual bill.
Why California Collects Nothing at Death
California voters approved Proposition 6 in June 1982, repealing the state’s gift and inheritance tax laws. The ban is codified in Revenue and Taxation Code Section 13301, which prohibits the state and every local government from collecting any tax on gifts, estates, or inheritances.1California Legislative Information. California Code Revenue and Taxation Code 13301 – Imposition of Tax It covers every death-related transfer regardless of estate size or the heir’s relationship to the deceased.
The Franchise Tax Board confirms that gifts and inheritances are not included in a recipient’s California income either.2Franchise Tax Board. Gifts and Inheritance Children, spouses, and other heirs keep the full inheritance without owing anything to Sacramento.
Federal Estate Tax in 2026
Federal law is where large California estates face real liability. 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 beginning in 2027.3Internal Revenue Service. What’s New – Estate and Gift Tax The increase is permanent, replacing the temporary higher exemption from the Tax Cuts and Jobs Act that had been scheduled to sunset at the end of 2025.
Estates above the threshold face a top rate of 40 percent on every dollar over the exempt amount.4Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax A single person dying in 2026 with a $20 million estate would owe federal tax on $5 million, producing a maximum liability of $2 million.
The gross estate includes the fair market value of everything the decedent owned at death: real estate, bank accounts, investment portfolios, business interests, personal property, and life insurance proceeds owned by the decedent. The IRS uses current fair market value, not what was originally paid.5Internal Revenue Service. Estate Tax Funeral expenses, debts, and charitable bequests are deductible before the tax is calculated.
Portability for Married Couples
Married couples can effectively double the exclusion to $30 million. When the first spouse dies, the executor can elect to transfer that spouse’s unused exclusion to the survivor by filing a federal estate tax return, even if no tax is owed.6Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax The surviving spouse then carries both exemptions forward. This is the only way to preserve the first spouse’s unused amount, which is why many estates well below the threshold still file.
Filing Deadline
Form 706 is due nine months after the date of death. Executors can request a six-month extension, but the estimated tax must still be paid by the original deadline to avoid interest charges.7Internal Revenue Service. Filing Estate and Gift Tax Returns
Property Tax Reassessment on Inherited Real Estate
This is where California heirs get blindsided. The inheritance itself is untaxed, but inheriting real estate usually triggers a property tax reassessment to current market value. For a home that has been in the family for decades under Proposition 13’s limited annual increases, that reassessment can multiply the annual property tax bill several times over.
Proposition 19, effective February 16, 2021, narrowed the parent-child exclusion. Before Prop 19, parents could transfer any property to their children without reassessment, including rental properties and vacation homes. Now the exclusion applies only when two conditions are both met: the property was the parent’s principal residence, and the child makes it their own principal residence within one year of the transfer.8California State Board of Equalization. Proposition 19
Even when those conditions are satisfied, there is a value cap. The new assessed value cannot exceed the existing factored base year value plus approximately $1,044,586 for transfers occurring between February 16, 2025, and February 15, 2027. If the home’s market value exceeds that limit, the difference gets added to the assessed value.8California State Board of Equalization. Proposition 19 Family farms qualify under separate rules.
To claim the exclusion, heirs must file for a homeowners’ exemption within one year of the transfer and submit an exclusion claim within three years. If the heir later moves out and stops using the home as a principal residence, the exclusion disappears and the property is reassessed to its fair market value as of the date they moved out.9California Legislative Information. California Code RTC 63.2 Investment properties, vacation homes, and commercial real estate inherited from parents get fully reassessed with no exclusion available.
Income Tax on Estate Earnings During Probate
The transfer of wealth is not taxed, but income the estate earns during probate is. Interest on the decedent’s bank accounts, rent from a rental property, and dividends paid after the date of death all belong to the estate as a separate taxable entity.
California requires an estate to file Form 541 with the Franchise Tax Board when gross income exceeds $10,000 or net income exceeds $1,000 for the year.10Franchise Tax Board. 2025 Fiduciary Income 541 Tax Booklet The estate may also need to file if it has any income from a California source or distributes income to beneficiaries.11Franchise Tax Board. Estates and Trusts Federally, the executor files Form 1041. For estates that take a year or more to close, these fiduciary returns become an annual obligation until the estate is fully distributed. Missed deadlines produce penalties and interest that come out of what beneficiaries eventually receive.
Inheriting From Someone in Another State
California’s silence on inheritance tax only protects you from California. Five states impose their own inheritance taxes: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If someone in one of those states leaves you money or property, you could owe inheritance tax to that state regardless of where you live. The tax is typically based on both the value of the inheritance and your relationship to the deceased, with close family members paying lower rates or receiving full exemptions.
Step-Up in Basis and Why Most Heirs Owe Nothing on a Sale
Inherited assets receive a step-up in basis to fair market value on the date of death.12Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If a parent bought a home for $200,000 and it was worth $1.2 million at death, the heir’s basis becomes $1.2 million. Selling at that price produces zero capital gains tax.
California residents get a bigger version of this benefit because California is a community property state. For assets held as community property between spouses, both halves step up when one spouse dies, not just the deceased spouse’s half.12Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If a couple owned a home as community property with a $400,000 original basis, and it was worth $2 million when one spouse died, the survivor’s new basis for the entire property is $2 million. In a common-law state, only half would step up. That full step-up can eliminate hundreds of thousands of dollars in potential capital gains tax when the surviving spouse sells.