Do you owe taxes on an inheritance in California?

Aiden Cox, CFP®, CSRIC®, Wealth Advisor at Canter Wealth, explains how inherited real estate, taxable investment accounts, and retirement accounts are taxed, and when taxes actually come due.

As wealth passes to the next generation, beneficiaries often ask whether an inheritance creates an immediate tax bill. In most cases, it does not. California has no state estate tax or inheritance tax. The federal estate tax applies only to estates above the federal exemption, which in 2026 is $15 million per individual ($30 million for a married couple). When it does apply, the estate generally pays it, not the beneficiary.

How an inheritance is taxed afterward depends on the type of asset: Real estate and taxable accounts generally receive a step-up in cost basis to fair market value at the date of death. Gains built up during the original owner’s lifetime are not taxed, and a later sale receives long-term capital gains treatment. California’s community property rules can provide additional basis benefits for a surviving spouse. Inherited IRAs and 401(k)s do not receive a step-up. Distributions are taxed as ordinary income, and most non-spouse beneficiaries who inherited in 2020 or later must fully distribute the account within ten years. Surviving spouses have additional options.

CHAPTERS

0:00 Do I owe taxes on an inheritance?

0:34 Estate and inheritance tax in California

0:49 Step-up in basis for homes and taxable accounts

1:20 Inherited IRAs and 401(k)s

1:39 Spousal beneficiaries and when taxes are owed

Transcription: Do I Owe Taxes on an Inheritance?

Do I owe taxes on an inheritance that I received recently? It’s a great question. I get that one all the time, especially with what we hear about the generational wealth transfer.

Common items that I hear from individuals are: If I’m inheriting a home or a taxable account, do I owe taxes? And what are the tax benefits for receiving money in an inheritance within these types of titles?

And then on the side of retirement accounts, when did I inherit it? Is that individual a spouse or not a spouse?

So there’s not any estate tax in California.

It really depends on where I’m inheriting those assets and what type of account they’re held in.

So with California being what’s called a community state, everything will receive what’s called a step-up in basis if it’s a non-retirement account.

So if Grandpa bought Home Depot stock back in the 1980s for $2 per share, and now it’s $100 per share, the cost basis will get stepped up to that market value, and I automatically get long-term capital gains treatment.

From there, it’s a matter of when I actually sell that position and if I pay any taxes.

On the retirement account side of things, it really depends on the year that you inherit those assets.

If I inherit anything in 2021 or later, then I have 10 years to deplete any of those IRAs or 401(k)s from a non-spousal beneficiary.

If I inherit it from my spouse, I have what’s called the stretch IRA rules that are going to be applicable.

So typically, on the nose, as long as I’m not inheriting anything over $30 million within an estate, no immediate taxes. Only when I take distributions from retirement accounts or sell out of those taxable accounts.

ABOUT THE SPEAKER

Aiden Cox, CFP®, CSRIC®, is a Wealth Advisor at Canter Wealth specializing in investment, estate, and tax planning. Before entering wealth management, he served five years in the United States Marine Corps as an Intelligence Analyst and Marine Security Guard at embassies and consulates worldwide. He holds a bachelor’s degree with a focus in finance from Northeastern University.