Many individuals who inherit assets from loved ones are concerned about potential tax implications. While inheriting a house does not directly result in income tax liability, there are several other type of tax considerations to keep in mind, including state and federal estate taxes, capital gains taxes, and property tax reassessments.

State Estate Tax (Inheritance Tax)

In California, there is no state inheritance tax, meaning heirs do not owe a separate state-level tax on inherited property. In 1982, California voters overwhelmingly passed Proposition 6, which repealed the state’s inheritance tax. The main argument in favor of repeal was that inheritance taxes unfairly impacted families, particularly those passing down homes and small businesses. However, this is not the case in all states. Some states impose an inheritance tax, requiring beneficiaries to pay taxes based on their relationship to the deceased. If the decedent owned property in another state with an inheritance tax, that state’s laws may apply.

Federal Estate Tax (Inheritance Tax)

At the federal level, estate taxes apply only if the estate’s value exceeds $13.99 million in the year 2025. If the total estate falls below this magic number, no federal estate tax will be due upon a person’s death. The estate itself, rather than the beneficiary, is responsible for paying the tax. High-net-worth estates exceeding the exemption amount could face tax rates of up to 40%.

This exemption amount of $13.99 million will be expiring at the end of 2025.In 2017, the Tax Cuts and Jobs Act (TCJA), implemented during President Trump’s administration, significantly increased the federal estate, gift, and generation-skipping transfer tax exemption. The exemption was raised to $12.92 million per individual in 2023, with adjustments for inflation. By 2025, this exemption is $13.99 million per individual. However, these provisions are set to expire at the end of 2025, potentially reducing the exemption amount unless Congress takes action to extend or modify the current law. If the exemption reverts to pre-TCJA levels (approximately $5 million adjusted for inflation), more estates may become subject to estate taxes.

Estate Planning Strategies to Minimize Tax Liability

Proper estate planning can help mitigate tax burdens for beneficiaries. Some effective strategies include:

  • Setting Up a Trust – Transferring a home into a properly structured trust can help avoid probate and provide greater control over how the property is distributed. Certain types of trusts may also offer tax benefits which can help minimize or sometimes eliminate tax liability.
  • Gifting the Property Before Death – Lifetime gifting can be a strategy, but it may result in losing the step-up in basis, potentially increasing future capital gains tax liability for heirs.

Conclusion

Beneficiaries should be aware of potential Federal and State estate tax implications. Proper estate planning, including the use of trusts and strategic tax planning, can help heirs minimize taxes and preserve family wealth.

If you would like to discuss estate planning, tax strategies, or setting up a trust, feel free to contact our office for a free consultation.