California’s tax environment is complex and has been in the news for notorious reasons. California’s exit tax and the complex real estate tax are among a few reasons why it holds this status.
Here’s a funny instance: Hot Bagels Are Taxed Differently Than Cold Ones! While a plain bagel is tax-exempt, it becomes taxable when it’s sliced or toasted. So, if you want to save on taxes, buy your bagel cold and cut it at home!
This article discusses the inheritance tax in California, if there is one, how to manage estate transfers, and more.
Contents of the article
Does California have an Inheritance Tax?
No, California does not impose an inheritance tax. Still, suppose you inherit something from deceased relatives in any of the following states. In that case, you will be subject to the relevant state inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Although the state does not impose a specific ‘California Inheritance Tax’, in the United States, you are liable to pay the federal estate tax upon transferring property upon death.
You are free to transfer and receive property up to $13.99 million per person (lifetime exemption) as of 2025, as that marks the exemption limit. Married couples filing together enjoy a higher exemption of $27.98 million.
While the transfer itself does not require you to file or pay taxes as per any guidelines in the state of California, the sale of inherited property does invite tax liability. You may owe the state capital gains tax on the difference between the selling price and the value of the property at the time of inheritance.
What are the Federal Tax Rates for a Sum Exceeding the Exemption Amount?
Estates exceeding the exemption are taxed at progressive rates ranging from 18% to 40%, as per the relevant slabs presented in the table below.
| Portion of Tax Base (amount over) | Marginal Tax Rate |
| $0 – $10,000 | 18% |
| $10,001 – $20,000 | 20% |
| $20,001 – $40,000 | 22% |
| $40,001 – $60,000 | 24% |
| $60,001 – $80,000 | 26% |
| $80,001 – $100,000 | 28% |
| $100,001 – $150,000 | 30% |
| $150,001 – $250,000 | 32% |
| $250,001 – $500,000 | 34% |
| $500,001 – $750,000 | 37% |
| $750,001 – $1,000,000 | 39% |
| Over $1,000,000 | 40% |
Table 1
Standard Deductions for 2025
Single: $15,000
Married Filing Jointly: $30,000
Head of Household: $22,500
The Role of Gift Tax
Gift tax also affects the calculation of tax liability. Following the IRC § 2001(c), progressive brackets apply to the taxable estate + adjusted taxable gifts. The tax calculated under this schedule is reduced by any gift tax previously paid.
Annual gift exclusion: $19,000 per recipient (per giver); Annual gifts up to $19,000 per individual do not invite gift tax or even a reporting requirement, and married couples enjoy a ‘gift-split’ allowing yearly exclusion of $38,000
If you receive gifts exceeding $19,000, they must be reported on Form 709. However, no tax is due unless the lifetime exemption is exhausted.
What are Some Inheritance Tax Loopholes?
The word loopholes indicates activities that are not legal! Let’s consider rephrasing the question.
What are some strategies I can use to manage my tax liability on the transfer of property? (estate planning)
There are some considerations you can use to manage your tax liability while estate planning.
We could start with what you can’t do, just to avoid confusion.
· You can’t avoid federal estate tax on amounts over $ 13.99 M.
· You can’t keep the Prop 13 property tax benefits if you turn inherited property and are using it for rental purposes
Now that that’s out of the way, let’s look at some tips for tax planning.
1. Step-Up in Basis (Capital Gains Tax Strategy)
When a property is inherited, its cost basis is increased or ‘stepped-up’ to its fair market value upon death. Heirs can now liquidate the inherited property with very little or no capital gains tax.
Illustration: If your parent purchased a home for $200K and it’s appraised at $900K upon inheritance, your basis now becomes $ 900 K. If you sell it for $910K, you only owe tax on the $10K gain, not $ 710 K.
This is the most significant tax-saving advantage of inheriting property in California.
2. Revocable Living Trust
A revocable living trust avoids probate but does not directly reduce taxes. This keeps assets out of probate court, accelerating the process of inheritance distribution. Although this does not lower the federal estate tax, it avoids probate-related expenses and possible delays.
3. Annual Gift Tax Exclusion
The annual gift tax exclusion can be used to pass on inheritance and reduce the taxable estate. i.e., parents or relatives could gift up to $19,000 per person tax-free. As mentioned earlier, married couples can give $38,000 per year per recipient.
4. Lifetime Gift Exemption ($13.99M in 2025)
Gifts exceeding the annual exclusion count toward the lifetime exemption tax are owed until the cumulative total of lifetime gifts and estate is valued over and above the federal exemption; the prevailing rate stands at $ 13.99 M.
5. Irrevocable Trusts
Used for advanced estate tax strategies.
- Assets placed in these trusts are excluded from the taxable estate
- Variants include:
- Irrevocable Life Insurance Trust (ILIT)
- Grantor Retained Annuity Trust (GRAT)
- Charitable Remainder Trust (CRT)
6. Family Limited Partnerships (FLPs)
This is used to transfer business or real estate ownership to heirs at a discount for tax purposes. It’s typically used with valuation reductions/discounts for reasons like lack of control or lack of marketability to reduce the estate’s taxable worth.
7. Prop 19 Rules (Property Tax Portability/Inheritance)
Since 2021, Prop 19 restricts tax exclusions for inherited homes unless the heir occupies the home and uses it as a primary residence. Moving into the property will keep your tax liability low. If not, the property taxes may rise based on the current market value.
8. Portability Election (for Married Couples)
Allows the surviving spouse to inherit any unused estate tax exemption. File IRS Form 706 within 9 months of death to preserve the first spouse’s unused exemption.
Conclusion
Tax planning or strategizing can be daunting, as taxation on inheritance can be complex and something that needs to be ticked off during an emotional time. Hiring a tax expert is almost always the right solution for such scenarios. Profitjets is proficient and a seasoned expert in tax advisory and planning, outsourced accounting and bookkeeping. Get in touch with us to navigate through your tax needs at a sensitive time, i.e., estate tax planning upon inheritance.
FAQs on California Inheritance Tax
1. How much is the inheritance tax in California?
No, the state of California does not hold you liable to an inheritance tax; however, residents of the US are subject to the federal tax upon death and transfer of property and capital gains tax upon sale of property.
2. Does the exemption as per the gift tax help manage my tax liability?
The annual gift tax exclusion can be used to pass on inheritance and reduce the taxable estate. i.e., parents or relatives could gift up to $19,000 per person tax-free. Married couples can give $38,000 per year per recipient.
3. What is the federal tax exemption rate?
You are free to transfer and receive property up to $13.99 million per person (lifetime exemption) as of 2025, as that marks the exemption limit. Married couples filing together enjoy a higher exemption of $27.98 million.
