Tax Implications of California Probate

At Best Coast Estate Law, P.C., we’ve walked many California families through probate, and we know just how confusing (and stressful) the process can be—especially when taxes enter the picture. Between court procedures, timelines, and unfamiliar terms, it’s easy to feel overwhelmed. So let’s simplify it.

First, What Is Probate?

Probate is the legal process of administering someone’s estate after they pass away. That includes validating the will (if there is one), identifying assets, paying debts, and distributing the remaining property to heirs. If there’s no will, the court appoints a personal representative to follow California’s intestate succession laws.

In California, probate usually goes through the Superior Court in the county where the deceased lived. It can take anywhere from several months to over a year, depending on the complexity of the estate.

Now, let’s get into the tax implications of probate.

Is There a “California Inheritance Tax”?

Nope! California does not have a state inheritance tax, and that’s great news. That means beneficiaries generally do not owe taxes simply for receiving an inheritance.

However, that doesn’t mean you’re completely off the hook. Other taxes may apply during probate, depending on the circumstances.

Federal Estate Tax

While California doesn’t have a state-level estate tax, the US government does have a federal tax. For many families, it won’t apply. In 2025, the federal estate tax exemption is $13.61 million per individual (or $27.22 million for married couples). Estates valued below this threshold won’t owe federal estate tax.

But if the estate exceeds that limit, the executor must file IRS Form 706 and possibly pay a substantial tax bill (up to 40% on amounts above the exemption). This is rare, but it’s something to keep on your radar—especially if the estate includes high-value real estate, investments, or business interests.

Income Tax for the Estate

Here’s where it gets a bit trickier. Even after someone passes away, their estate may continue to earn income, especially if it holds rental properties, stocks, or other investments. That income is taxable.

The estate becomes a separate taxpayer and must file a fiduciary income tax return (IRS Form 1041) if it earns more than $600 in gross income during the probate process.

Some common examples of taxable estate income:

• Rent collected from real estate properties
• Interest from bank accounts or bonds
• Dividends from stocks
• Capital gains from asset sales

Note: This income is separate from the deceased person’s final individual income tax return, which is also required for the year of their death (Form 1040).

Capital Gains Tax Owed

Beneficiaries may face capital gains taxes if they sell inherited assets for more than their “stepped-up” value.

When someone inherits an asset like real estate or stocks, the asset’s value is “stepped up” to its fair market value at the time of the decedent’s death. This helps reduce future capital gains taxes when the beneficiary sells the asset.

Let’s say your mom bought her house for $200,000 in 1995. At her death in 2025, the home’s current market value is $900,000. If you inherit the home and sell it shortly afterward for $920,000, you’ll only pay capital gains tax on the $20,000 difference—not the full $720,000 appreciation.

This step-up in basis can be a huge tax saver, and it’s one reason thoughtful estate planning is so important.

Property Tax Reassessment

In California, real property is usually reassessed at market value when it’s transferred through probate. This can lead to higher property taxes for heirs.

However, thanks to California Proposition 19 (effective February 2021), certain parent-to-child transfers may avoid reassessment if specific conditions are met. For example, the child must use the inherited home as their primary residence, and there’s a cap on the excluded value.

Navigating these rules can be tricky, but an experienced California probate or estate planning attorney can help you understand your options.

Executor Responsibilities and Tax Deadlines

If you’re serving as the executor (also called a personal representative), you have a legal duty to file the correct tax returns on time—both for the deceased individual and the estate itself.

That includes:

• The final Form 1040 (individual tax return)
• Form 1041 (estate income tax, if applicable)
• Form 706 (federal estate tax return, if applicable)
• California state income tax returns

You may also need to apply for an Employer Identification Number (EIN) for the estate, even if no employees are involved.

Missing tax deadlines can lead to penalties, so it’s wise to work with a tax professional or estate attorney familiar with California probate.

How to Minimize Probate Taxes

The best way to avoid the headaches of probate taxes? Plan ahead.

A well-structured estate plan can reduce probate time and costs, avoid unnecessary taxes, and make life much easier for your loved ones. Tools like revocable living trusts, beneficiary designations, and joint ownership can help assets pass outside of probate entirely.

Our California estate attorney works with California families every day to build thoughtful, tax-efficient estate plans that protect what matters most.

Contact Us Today!

While California doesn’t impose its own inheritance or estate tax, the tax implications of California probate can still be significant. Between federal estate tax, income tax, capital gains, and property tax reassessments, it’s crucial to know what might apply to your situation—or the estate you’re handling.

If you’re navigating probate now or simply want to plan ahead, we’re here to help. Call our estate lawyers to make sure your estate—or your loved one’s—goes through probate as smoothly (and tax-efficiently) as possible.