USA – CALIFORNIA Law and Practice Contributed by: Jennifer Jordan McCall, Ashley Huh and Matthew Perotti, Pillsbury Winthrop Shaw Pittman LLP
1.3 Income Tax Planning California Capital Gain or Loss Adjustment California capital gains are taxed at ordinary income tax rates. Appreciated assets receive a step up in basis to their fair market value at the time of death. In California, a special planning opportunity exists that property held as community property will receive a full step up on the entire property upon the death of the first spouse to die, even though that spouse is only deemed to own one-half of the community property assets. 1.4 Taxation of Real Estate Owned by Non- Residents Non-resident aliens and non-citizens are subject to United States and California income tax on income generated by real property located in the US, or California, respectively. The US tax is a flat 30% flat rate, or lower treaty rate of the resident country, if the property is not effectively connected with a US trade or business. Non-resident aliens can elect to treat all income from US real property as effectively connected income with a trade or business, which then allows deductions related to the property to be used to reduce taxable income. At sale, capital gains are taxed in the same manner as if it were sold by a US citizen. Non-residents are also subject to a 15% non-resident withholding tax on the gross sales pro - ceeds unless the non-resident seller is exempt from the withholding, either because it is a low-value sale (under USD300,000) or if withholding is reduced or eliminated under a treaty between the non-resident jurisdiction and the US. To request a reduction or dis - pensation from withholding on dispositions of US real property use IRS Form 8288-B. In California, non-resident aliens and non-citizens are taxed on real estate income and may take advantage of deductions, exemptions and other rules to reduce taxable income from real property in the same manner as US citizens. 1.5 Stability of Tax Laws In 2021, 2022, and 2023, California lawmakers pro - posed a bill (most recently, California AB 259) that would impose a 1% annual wealth tax on households with a net worth of more than USD50 million and 1.5% on households worth more than USD1 billion. A ver -
to decrease to USD5 million in 2025, indexed for infla - tion; however, anticipated federal legislation known as the One Big Beautiful Bill Act would, if passed, permanently increase this exemption to USD15 mil - lion, indexed for inflation, starting in 2026. The unused portion of a deceased spouse’s or registered domestic partner’s federal exemption is portable to the survi - vor, the deceased spouse unused exemption (DSUE) amount. The survivor elects portability by reporting the value of the deceased spouse’s or partner’s estate on the date of death, less taxable gifts, on IRS Form 706. Alternative Minimum Tax Exemption The federal AMT exemption amount for tax year 2025 starts at USD88,100 (USD68,650 for married indi - viduals filing separately) and begins to phase out at USD626,350 for unmarried individuals and married individuals filing separately. The federal AMT exemp - tion amount for tax year 2025 starts at USD30,700 for estates and trusts and begins to phase out at USD102,500. The federal AMT exemption amount for tax year 2025 starts at USD137,000, with phase-out beginning at USD1,252,700 for married couples filing jointly or for surviving spouses. California exempts up to USD40,000 of alternative minimum taxable income from the alternative mini - California does not impose a gift tax. However, there is a substantial federal gift tax. The United States federal annual gift tax exclusion allows the taxpayer to transfer tax-free gifts to any number of individuals up to USD19,000 in 2025 a per individual recipient. If the recipient receives more than the exclusion, the excess is charged against the lifetime gift and estate tax exemption of USD13.99 million in 2025. Gifts are reported on IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. The tax rate on gifts exceeding the lifetime gift and estate tax exemption is between 18% and 40%. The lifetime gift exemption and the estate tax have a single combined exclusion. Accordingly, lifetime gifts will reduce the exemption remaining to be applied against estate taxes at death. mum tax, subject to ongoing change. Annual Gift and Estate Tax Exclusion
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