inheritance tax
Real Estate & Around the House

Top 5 Things You Need to Know About Inheritance Tax in California

September 22, 2023

If you’re planning on inheriting some money, it’s important to understand inheritance taxes and how they work. This way, you can make informed decisions about your inheritance.

Inheriting a large sum of money can be overwhelming, especially regarding taxes. Fortunately, California doesn’t have an inheritance tax. However, there are still plenty of things to consider.

There is No State-Level Inheritance Tax

While some state-level inheritance taxes exist, California does not levy such a tax. However, this does not mean that heirs won’t have to pay state income taxes or capital gains taxes if they choose to sell their inherited assets. Beneficiaries should know how much is inheritance tax in California.

The big difference between inheritance and estate taxes is that the former comes directly from the deceased’s estate before those assets are distributed to beneficiaries. At the same time, the latter is imposed on the beneficiary as soon as they receive those assets.

Fortunately, heirs will not have to worry about paying an inheritance tax if they don’t reside in one of the six states with such a tax. This is because, unlike the federal estate tax, the state-level inheritance tax only applies to property inherited within the jurisdiction of the state.

However, this does not mean that there are no other state-level taxes – such as the generation-skipping transfer tax (GSTT) – that beneficiaries of an estate might have to face. This is because the GSTT closes a loophole that allows wealthy Americans to avoid double taxation on inheritances passed down from parents to their grandchildren.

There is No Income Tax on Inherited Money

Many people wonder if they will have to pay income taxes on their inheritance. There is no tax on inherited money in California. However, you may have to pay capital gains if you inherit property such as a house from someone else and sell it.

If you need more time, you can always speak to a professional. Ultimately, you only have to claim your inheritance as income once it makes you money. This is why tracking the amount you receive and its earnings is important.

In addition, you need to know that the federal estate tax and generation-skipping transfer tax are still applicable. The former is a levy imposed on assets that exceed the federal estate tax exemption, and the latter is a way to close loopholes by ensuring that wealth passes through multiple generations before being taxed.

However, if you are smart with your assets and plan correctly, you can avoid paying inheritance taxes in California. You can also minimize your tax liability by putting inherited properties into trusts and using 1031 exchanges to purchase investment property.

There is no Capital Gains Tax on Inherited Property

Most people think of inheritance as a gift, but in the eyes of the federal government, it is more like income. Depending on how an estate or Trust is set up, gifts and inheritances can be subject to significant taxes. If you want to learn more about inheritance tax or how it might affect your estate planning, contact an experienced California estate lawyer.

Inheriting property can be a complex process, especially for real estate. Inheritors can sell the property as soon as it is inherited or use it as their primary residence. If the latter is the case, the property value can benefit from a “step-up basis,” which means it will not be reassessed when they sell it. However, capital gains taxes may apply if the property is inherited and sold.

The property’s original purchase price has increased to the current market value. This can significantly increase the taxes owed when selling an inherited property. Those who wish to avoid the capital gains tax on inherited property can opt for a joint sale with the other heirs of the property, which will keep it out of the hands of a real estate agent and avoid any potential complications.

There is No Estate Tax on Inherited Property

The difference between a state estate or inheritance tax and a capital gains tax is that the former hinges on what was left by the deceased person to their beneficiaries. At the same time, the latter depends on what was sold once they died. Fortunately, California does not impose either of these taxes.

It is among the few states that does not levy a death tax. However, if you inherit property from another state with an estate or inheritance tax, you may still be subject to this levy, depending on the individual state’s rules.

This is because federal estate taxes are levied on the fair market value of a person’s estate, which is determined when they pass away. This complex issue requires proper planning, making it even more important to have qualified legal help. It is possible to avoid paying estate taxes by leaving a substantial sum to charity or renouncing your rights to the rest of your estate. This way, the rest of your estate can pass to your family without paying any estate or inheritance taxes.

There is No Death Tax on Inherited Property

Only six states in the United States impose an inheritance tax, and the rules and rates vary by state. An estate or inheritance tax is a levy on the value of an individual’s assets that are transferred upon death to beneficiaries. This is a different type of tax than an income or capital gains tax levied on a person’s profits from investments.

California does not have an inheritance tax, but this does not mean you won’t have to pay other taxes on your inherited property. For example, if your loved one leaves you a rental home, you will likely have to claim it as income unless it is held in Trust.

The complexity of inheritance and estate taxes makes speaking with a California estate lawyer critical. 

Leave a Reply