Do You Pay Taxes on Inherited Property or Money?

By Jay S. Yu, Esq., Yu & Yu Law, Fullerton, California · Last reviewed October 2026

For most California families, the inheritance itself is not taxed. California has no inheritance tax and no estate tax, the federal estate tax applies only to very large estates, and an inheritance is not counted as income on your federal tax return. Taxes can still come up later, though, depending on what you inherit and what you do with it. Figures below are for 2026.

Is There a Federal Estate Tax on an Inheritance?

The federal estate tax is paid by the estate, before anything is distributed, and only when the estate is larger than the exemption. For 2026, the exemption is $15 million per person, and it is adjusted for inflation in later years. A married couple can use both spouses’ exemptions, so the vast majority of estates owe no federal estate tax. Above the exemption, the top rate is 40%.

Does California Have an Inheritance Tax?

California repealed its inheritance tax in 1982 (see California estate tax) and has not collected an estate tax since 2005. If the person who passed away lived in California and owned property only in California, there is no state tax on the inheritance.

Can Another State Tax Your Inheritance?

As of 2026, 12 states and the District of Columbia impose an estate tax: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Five states impose an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Several of these states exempt far less than the federal amount.

These taxes depend on where the person who died lived and where their real estate is located, not on where the beneficiary lives. A California resident who inherits from a parent who lived in Pennsylvania may owe Pennsylvania inheritance tax. A California resident who inherits from a parent who lived in California does not owe another state’s inheritance tax. Inheritance tax rates usually depend on the beneficiary’s relationship to the person who died, and spouses and children are often exempt or taxed at a reduced rate.

Do You Pay Capital Gains Tax on Inherited Property?

When you inherit property, its tax basis generally “steps up” to its fair market value on the date of death. If you later sell it, capital gains tax applies only to the growth after that date.

For example, if your parents bought a house for $150,000 and it is worth $900,000 when the surviving parent dies, your basis is $900,000. If you sell it for $925,000, your taxable gain is $25,000, not $775,000.

For married couples in California, community property can receive a full step-up in basis at the first spouse’s death, not just on the deceased spouse’s half. That is one reason how a couple holds title matters. Read more about the double step-up in basis.

Are Inherited Retirement Accounts Taxable?

Some inherited assets carry income tax with them, because the person who died never paid tax on that money:

• Traditional IRAs and 401(k)s: Withdrawals are taxed as ordinary income to the beneficiary. Most beneficiaries other than a surviving spouse must empty an inherited account within 10 years. See what happens to your 401(k) when you die.

• Annuities: The portion that represents earnings is taxable.

• Unpaid wages and bonuses: Income earned before death but paid afterward is taxable to whoever receives it.

Inherited Roth IRAs are generally free of income tax, as long as the account met the five-year holding rule.

Does an Inherited California Home Get Reassessed?

For many California families, property tax is the largest tax issue in an inheritance. Under Proposition 19, a home passing from a parent to a child keeps the parent’s lower assessed value only if the child makes it their principal residence within one year. Even then, the benefit is capped. For transfers from February 16, 2025 through February 15, 2027, if the home’s market value exceeds the parent’s assessed value plus $1,044,586, the difference is added to the new assessed value. A child who keeps the home as a rental or vacation property generally faces a full reassessment.

Ways to Reduce Taxes on What You Leave Behind

• Annual gifts: In 2026, you can give up to $19,000 per recipient without using any of your lifetime exemption.

• Holding appreciated assets: Property given away during life keeps your original basis, while property inherited at death receives the step-up. Holding highly appreciated property until death can save your heirs significant capital gains tax.

• Community property title: For married couples, holding assets as community property where appropriate allows both halves to receive a step-up.

• Beneficiary designations: Naming retirement account beneficiaries with the 10-year rule in mind, including whether a trust should be the beneficiary.

• Charitable gifts: Gifts to charity at death reduce a taxable estate, and retirement accounts are often the most tax-efficient assets to leave to charity.

• Larger estates: For estates near or above the federal exemption, irrevocable trusts and lifetime gifting can move future growth out of the taxable estate.

The Bottom Line

For most families, the real tax questions are not estate or inheritance tax. They are income tax on inherited retirement accounts, capital gains when property is sold, and property tax reassessment on the family home. A well-designed estate plan addresses all three.

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Disclaimer: This article is for informational purposes only and does not constitute legal advice. Laws change frequently and there is no guarantee that the information in this article will be applicable or correct when you read this. You should consult with an attorney to discuss your specific situation. This article discusses California law; Jay S. Yu is licensed to practice in California.