Tax burlap bag, family members, house on rows of coin money

Is Your Inheritance Taxable?

The Elder & Disability Law Firm, APC April 17, 2023

You’ve just inherited some real property and a nice chunk of money from a loved one or friend. While you’re excited, you may be wondering whether both the Californian and federal governments will want their share of your newfound wealth and take out taxes.

Fortunately, in California, there is neither an estate nor an inheritance tax, and the federal estate tax clicks in only if the value of the estate surpasses $12.92 million in 2023 (it rises each year according to inflation). The IRS likewise does not treat your inheritance as income. 

Depending on what you do with your newfound wealth, taxes could come into play down the road, but when the probate court or trustee releases the assets to the beneficiaries, unless that federal level is breached, no recipient should have to pay any taxes. 

For all your estate planning or inheritance questions in or around Redlands, California, contact our skilled inheritance law attorney at The Elder & Disability Law Firm, APC. We also serve clients in nearby communities such as Rancho Cucamonga, Palm Springs, and Riverside. Despite our name, we provide individualized service to individuals of all ages. 

Estate vs. Inheritance Taxes 

Estate taxes are levied on the overall assets of the decedent before any distributions are made to beneficiaries. Only 12 states and the District of Columbia exact estate taxes, and California is not among them. 

As mentioned above, the IRS will impose an estate tax on large estates. Specifically, large means those for an individual that exceed $12.92 million. The exemption is doubled for married couples. For estates exceeding the threshold, the tax can range from 18 to 40 percent. 

An inheritance tax is imposed on the person who is the beneficiary, and what’s received is taxable but only in six states and not at the federal level. California is not one of the half-dozen states with inheritance taxes. 

What If I Inherit Property From a Non-California Resident? 

Say your uncle passes away in Pennsylvania, which does have an inheritance tax, and leaves you his $1 million residence. Are you on the hook to pay the commonwealth’s inheritance tax? In this case, probably yes. But if the estate were only $10,000, you would probably get a pass. Also, if it’s your spouse who passes away in an inheritance tax state, you would not have to pay the tax. 

To note, the only states with inheritance taxes are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The federal government does not have an inheritance tax, and the IRS will not come after you for any share of your newfound wealth. 

Capital Gains Taxes 

Let’s assume you inherit an $800,000 home in California, and you decide to sell it and cash out. In this case, you would be subject to capital gain taxes if the property appreciates in value while you possess it and before you sell it.  

Fortunately, the IRS will not consider the capital gains that accrued from the time the decedent purchased it. Say the home was purchased way back when for $150,000 and you sell it for $850,000, that would be $700,000 in capital gains. That is now how it works, however. If you inherit it at a value of $800,000 and sell it for $850,000, you would at most be on the hook for $50,000 in capital gains. 

The capital gains tax could also apply if you inherit securities or other investment products. If you hold them for three years, for instance, and they triple in value, you would be liable for the capital gains earned. 

Get the Answers You Need 

If you stand to inherit property or money and are wondering what your best options are to avoid taxes now or in the future, contact us at The Elder & Disability Law Firm, APC. We proudly serve clients in the Inland Empire, including Redlands, Riverside, Rancho Cucamonga, Palm Springs, and more.