It is important to consider tax implications when creating an estate plan in Carlsbad, California. In addition to federal tax laws, such as the federal estate tax and gift tax, California has tax laws that can affect how you deal with beneficiaries inheriting part of your estate. Andrew Fesler is a qualified estate planning attorney who can answer all your questions about how the current tax laws affect inheritance.
Does California Have an Inheritance or Estate Tax?
Thankfully, California has no state-level estate or inheritance tax. If you inherit property as a California resident, you will not need to pay an inheritance or estate tax. The assets that you receive are not considered income under California law.
However, this does not mean that collecting an inheritance in California is always tax-free.
You Have to Pay Taxes on Income Earned from Inherited Property in California
Even though there is no inheritance tax in California, you must pay taxes on any income the inherited property earns. Examples of income that could be produced from inherited property include:
- Interest – If you deposit inherited cash into an interest-earning account (i.e., a savings or money market account), you must pay income tax on any interest you earn.
- Dividends – If you inherited stocks or decide to invest inherited cash into stocks, you must pay income tax on any dividends you receive. When you sell the stock, you must pay capital gains tax.
- Rental income – If you decide to rent out a property you inherited, you must pay income tax on all rental income you receive.
- Pensions and Retirement Accounts – You must pay income tax when you withdraw income from a retirement account.
- Capital Gains on a Real Property Sale – You have to pay tax on any gains you earn when you sell inherited real estate. The capital gains tax is based on the property’s value at your father’s time of death, not its value when your father originally purchased it.
How Does Prop 19 Impact Inherited Properties in California?
Prior to 2020, when a child inherited real estate from their parents, California did not reassess the real estate for property tax purposes. This allowed children to maintain their parent’s low property taxes when they inherited the home, even if they used it as a rental or vacation house.
In 2020, California passed Proposition 19, making inherited properties more expensive to maintain. The inherited property must be reassessed for property taxes purposes unless the child lives in the home as their primary residence. After inheriting the property, the child has a one-year window to move into the home.
In light of this relatively recent change in law, some individuals may want to reconsider their estate planning. Property taxes can be a significant expense, especially for high-value homes. Every situation is unique, so you should contact a local Carlsbad attorney to determine which options are best for you.
Your Carlsbad Estate Planning Attorney
Andrew Fesler is an experienced Carlsbad estate planning attorney with over twenty years of experience. His ‘meet-the-client-where-they-are-at’ attitude defines the estate planning experience you will receive with “Andy.” He is a engaged and empathetic lawyer that is all about quality relationships and individualized services. He will know how to best design your plan so your heirs do not suffer unduly from tax laws and create an estate plan that fits your needs. Contact our office today at (760) 444-0943 for a free consultation.