California residents have 0% state inheritance (or estate) tax. Instead, California estates follow the federal estate tax, which taxes only large estates valued at $12.6 million or more. The estate tax can range from 18%-40%. Thus, estates valued at less than the IRS threshold are exempt from this tax.
What Is an Inheritance Tax?
Not all states have an inheritance tax. California is a state with no inheritance tax. If you reside in a state that has inheritance tax, it means a tax might apply on money or property left to others after someone dies.
When Does Inheritance Become Taxable?
Income tax only applies to income generated after the grantors pass away, not the principal (the amount originally received).
If you receive an inheritance in California, consider yourself lucky. You can receive your California inheritance without anticipating major tax liability in most cases.
Inheriting Property From a Non-California Resident
If you live in California and inherit money from someone who was a resident of a state that imposes an inheritance tax, you may still be exempt and not have to pay a tax. This is because each state operates their inheritance tax differently and there may be exemptions depending on your relationship with the deceased (if you are a spouse) or the amount inherited (some states exclude small inherited amounts from being taxed). However, if these exceptions do not apply, you will have to pay an inheritance tax.
Selling a Deceased Parent’s Home
You may be curious about what kind of taxes you have to pay if you inherit your parents’ home after their deaths and decide to sell it. You may or may not have to pay capital gains taxes. The IRS will consider the value of the house at the time you inherited it, so if you sell the house immediately upon inheriting it, there will be no difference between the value of the house and the sale price, thus no capital gains to tax. However, if you let the property appreciate in value with time and then sell, the difference between the value of the property at the time of the inheritance, and what it will sell for will be your capital gains – that will be taxed.
California Inheritance Tax & Gift Tax
California does not have an inheritance tax, estate tax, or gift tax. However, California residents have to follow the federal laws governing gifts during their lives, and their estates after they die.
In California, a resident may gift a certain amount of property in a given tax year, tax-free (in 2022 this amount is $16,000). Estates valued at less than $12.06 million in 2022 for single individuals are exempt from an estate tax.
Federal Estate Tax
In 2022, only estates worth more than $12.06 million dollars for single individuals and $24.12 million dollars for married couples are subject to this tax. However, even an exempt estate may have certain items within the estate subject to capital gains taxes when sold. These are taxes on the profit earned when property, such as a house, car, or stock, are sold for more than the purchase price.
Contact an Estate Planning Lawyer Today
Informing yourself is one of the best ways to protect your estate for your loved ones after you pass. The Orange County estate planning attorneys at Evolution Tax & Legal specializes in estate planning and we can provide information and services tailored to your particular situation to help you understand your options and make a plan. Contact us for a free consultation to help protect your estate and put your mind at ease.