Steven and Diane Freeling live a quiet life in an Orange County, California, planned community called Cuesta Verde, where Steven is a successful real estate developer and Diane looks after their children Dana, Robbie, and Carol Anne. Carol Anne awakens one night and begins conversing with the family's television set, which is displaying static following a sign-off. The following night, while the Freelings sleep, Carol Anne fixates on the television set as it transmits static again. Suddenly, a ghostly white hand emerges from the television, after which there is a violent earthquake. As the shaking subsides, Carol Anne announces "They're here".
One year after the Poltergeist (1982 film), Cuesta Verde is being evacuated and turned into an archaeological paranormal dig centered around the spot where the Freelings' home stood before it imploded. The excavation leads to the discovery of a cave by a ground crew. Its existence is revealed to psychic Tangina Barrons (Zelda Rubinstein), who tells a friend of hers, Taylor (Will Sampson), a Native Americans in the United States shaman. After investigating the cave for himself, Taylor realizes that Rev. Henry Kane (Julian Beck), a deceased, insane preacher, has located Carol Anne and goes to defend her.
The Freeling family has sent Carol Anne (Heather O'Rourke) to live with Diane's sister Pat (Nancy Allen (actress)) and her husband Bruce Gardner (Tom Skerritt) in Chicago. Carol Anne has been told she is living with her aunt and uncle temporarily to attend a unique school for gifted children with emotional problems, though Pat thinks it is because Steven and Diane just wanted Carol Anne out of their house. Pat and Bruce are unaware of the events that the Freeling family had endured in the Poltergeist (film series), only noting that Steven was involved in a bad land deal. Along with Donna (Lara Flynn Boyle), Bruce's daughter from a previous marriage, they live in the luxury skyscraper (Chicago's 100-story John Hancock Center) of which Bruce is the manager.