Cal. Code Regs. tit. 18 § 13983.1
If paid by the decedent's estate or the transferee of the property, the unpaid amount of any bona fide, allowable, and legally enforceable debt of a decedent existing at the time of his death, together with any accrued interest thereon at the time of death, which is secured by a mortgage or other lien on any property included in any transfer subject to the Inheritance Tax Law made by the decedent, may be deducted from the market value of the property. A like deduction is permissible for any such obligation not paid by the decedent's estate or the transferee, where the property affected by the mortgage or other lien is distributed to the transferee subject to the mortgage or other lien. A debt of the decedent which is secured by a mortgage or other lien on property situated outside the State of California or on any other property which is not subject to the Inheritance Tax Law is not deductible. Also, a secured obligation which is paid out of mortgage insurance is not deductible.
If the decedent was not personally liable at the time of his death for a debt secured by a mortgage or other lien on property transferred by him, no deduction will be allowed for any payment of the debt by the estate or the transferee. However, if the particular property is distributed to the transferee subject to the mortgage or other lien, the unpaid amount of the debt at the date of the decedent's death, together with interest accrued thereon at that time, may be deducted from the market value of the property.
NOTE: Reference: Section 13983, Revenue and Taxation Code.
Cal. Code Regs. Tit. 18, § 13983.1