Colorado Step-Up in Basis Guide

When you inherit property in Colorado, the step-up in basis rule can erase decades of capital gains for tax purposes. The tax basis of what you inherit resets to its fair market value on the date the owner died. Years of appreciation drop out of the math, and you only owe capital gains tax on any increase in value after you inherit it.

Understanding how the step-up works matters whether you plan to keep inherited property, sell it, or pass it on. This guide explains the federal rules, shows how Colorado's flat income tax treats the gain, and covers the one point that trips up married couples: Colorado is a common-law state, so only the decedent's share of jointly owned property steps up.

What Is Step-Up in Basis?

When someone buys property or an asset, they have a tax basis in it, usually what they paid. When they sell, they owe capital gains tax on the difference between the sale price and that basis.

The Problem Without Step-Up

Say your mother bought a house in Denver in 1990 for $110,000. When she died in 2025, it was worth $640,000. If she had given you the house as a gift during her lifetime, your basis would have been her original $110,000, called carryover basis. Selling for $640,000 would leave you with $530,000 in taxable capital gains.

How Step-Up Fixes This

Because you inherited the house instead of receiving it as a gift, your basis steps up to the fair market value on the date of death: $640,000. If you sell for $640,000, your capital gain is $0. Even if you sell a year later for $665,000, your taxable gain is only $25,000 instead of $555,000.

The Legal Foundation

The step-up comes from Internal Revenue Code Section 1014, which sets the basis of property acquired from a decedent at its fair market value on the date of death. It applies to property acquired from a decedent through:

• Probate
• A revocable living trust
• Joint tenancy with right of survivorship, for the decedent's share
• A Colorado beneficiary deed (transfer-on-death deed)
• A beneficiary or payable-on-death designation

How Step-Up Works for Colorado Inherited Property

What Qualifies for Step-Up

Nearly all capital assets inherited from a decedent receive a step-up:

• Real estate (homes, land, ranch and commercial property)
• Stocks and bonds
• Mutual funds and ETFs
• Business interests
• Collectibles and artwork
• Personal property that carries real market value

What Does Not Qualify

Some assets do not step up:

• Income in respect of a decedent (IRD): Traditional IRAs, 401(k)s, and other tax-deferred retirement accounts. Distributions are taxed as ordinary income to the beneficiary.
• Property gifted before death: If the decedent handed you the property as a gift during life, you generally take their original basis under IRC Section 1015 (carryover basis), not a stepped-up basis.
• Assets you gave the decedent within one year of death: If you gifted appreciated property to the decedent and it came back to you within a year of death, no step-up applies (IRC Section 1014(e)).

Colorado Is a Common-Law (Separate Property) State

This is the point married couples miss. Colorado is a common-law state, sometimes called a separate property state, not a community property state. That changes how much of a jointly owned asset steps up:

• Only the decedent's share of jointly owned property receives a step-up.
• If spouses own a home as joint tenants with right of survivorship, only half the home steps up when the first spouse dies.
• The surviving spouse's half keeps its original basis. There is no double step-up.

Community property states are the ones where the entire asset can step up on the first spouse's death. Colorado does not work that way, so the surviving spouse carries a mixed basis into any later sale.

Calculating Your New Tax Basis

Step 1: Determine Fair Market Value at Death

The date-of-death value becomes your new basis. By asset type:

Real estate:

• Order a professional appraisal as of the date of death.
• The estate may already have a valuation from the probate inventory.
• Keep this documentation permanently.

Stocks and publicly traded securities:

• Use the average of the high and low trading prices on the date of death.
• If death fell on a weekend or holiday, average the trading prices from the business days before and after.

Closely held business interests:

• These need a professional business valuation.
• The estate may have obtained one for probate or federal estate tax purposes.

Personal property:

• Get appraisals for higher-value items.
• Use fair market value based on comparable sales.

Step 2: Check the Alternate Valuation Date

If the estate files a federal estate tax return (Form 706), the personal representative can elect the alternate valuation date under IRC Section 2032, which is six months after death. That election is only allowed when it lowers both the gross estate and the federal estate tax, and if elected it sets your basis at the six-month value (or the disposition value if the asset was sold sooner). Most Colorado estates never file a Form 706 because the federal exemption is so high, so this election is uncommon.

Step 3: Add Post-Death Improvements

After you inherit, capital improvements raise your basis:

• Renovations and additions
• Major upgrades that add value (new roof, new HVAC)
• Land improvements

Keep receipts and records for every improvement.

Example Calculation

Step-Up for Different Asset Types

Real Estate

Real estate is the most common place the step-up matters, and Colorado real estate has appreciated hard. Inherited real estate can reach you through several channels:

• Probate: The estate takes the stepped-up basis through probate administration, which passes to the heir.
• Trust: Property held in a Colorado revocable living trust receives the same step-up as probate property.
• Beneficiary deed: Property passing by a Colorado beneficiary deed receives the step-up.
• Joint tenancy: The decedent's share steps up. The surviving owner's share does not.

Stocks and Securities

Each security held at death steps up to its date-of-death value. This helps most with stock held for decades that carries large unrealized gains.

Mutual funds: The basis steps up to the net asset value on the date of death, wiping out the unrealized gain inside the fund.

Brokerage accounts: Ask the broker for a date-of-death statement. Most firms produce one on request.

Family Businesses, Ranches, and Farms

Business interests (partnerships, LLCs, S corporations, sole proprietorships) step up, and this reaches many Colorado ranch, farm, and mineral operations:

• Sole proprietorship: Each business asset receives its own step-up.
• Partnership or LLC: The inherited interest steps up, and a Section 754 election can adjust the inside basis of the entity's assets.
• S corporation: The stock basis steps up, but the inside basis of the corporation's assets does not change.

Collectibles and Personal Property

Art, antiques, jewelry, vehicles, and other higher-value personal property all step up. Document these with appraisals at the time of death.

Colorado Capital Gains Tax

Colorado has no separate capital gains tax. A capital gain flows through your federal taxable income and is taxed at Colorado's flat individual income tax rate.

The Flat Rate

Colorado taxes the income of every individual, estate, and trust at a flat 4.40% under C.R.S. Section 39-22-104. A TABOR surplus refund can temporarily lower the rate in a qualifying year, to as low as 4.25% under C.R.S. Section 39-22-627, so confirm the rate for the year you actually sell.

Gains Realized by the Estate

If the estate or trust sells inherited property during administration and keeps the gain rather than distributing it, the estate itself may owe Colorado fiduciary income tax at the same flat rate on Colorado Form DR 0105, alongside the federal Form 1041. Gains passed out to beneficiaries are reported to them on a Schedule K-1 instead.

Reducing the Colorado Gain

The same items that lower your federal gain also lower the Colorado figure, because Colorado starts from federal taxable income:

• Selling expenses (real estate commissions, closing costs)
• Legal and accounting fees tied to the sale
• Capital improvements you added to basis

Federal Capital Gains Tax

At the federal level, long-term capital gains (assets held more than one year) get preferential rates:

These are 2025 thresholds and adjust annually for inflation.

Net Investment Income Tax

An extra 3.8% tax applies to net investment income, including capital gains, once modified adjusted gross income passes $200,000 (single) or $250,000 (married filing jointly).

Holding Period for Inherited Property

Inherited property counts as long-term automatically under IRC Section 1223(9), no matter how long the decedent or the heir held it. You qualify for the lower long-term rates even if you sell the day after you inherit.

No Colorado Estate or Inheritance Tax

There is no Colorado estate or inheritance tax. Colorado's estate tax statute (C.R.S. Section 39-23.5-103) sets the tax equal to the old federal state death tax credit, and federal law phased that credit out to zero for deaths after 2004. So no Colorado estate tax is due and no state estate tax return is required. Colorado also imposes no inheritance tax on beneficiaries.

That leaves only the federal estate tax, and it reaches only estates above the federal exemption ($15 million per person in 2026). With no state-level transfer tax on the inheritance, the step-up is the main tax event most Colorado heirs need to plan around. For how the federal estate tax treats larger estates, including portability and Form 706, see our Colorado federal estate tax guide and the Colorado estate tax overview.

Planning Strategies to Maximize Step-Up

Hold Appreciated Assets Until Death

The simplest strategy: if you hold highly appreciated assets, keeping them until death lets your heirs take a full step-up. Selling before death triggers capital gains tax you could have skipped.

Gift Low-Basis Assets to the Right Person

If you plan to give assets during life, give the ones with the smallest unrealized gain. Keep the highly appreciated assets in your estate so they get the step-up.

Avoid Gifting Highly Appreciated Property

When you gift property during life, the recipient takes your original basis (carryover basis) and loses the step-up. For assets that have run up a lot, transferring at death almost always beats gifting.

Use a Revocable Living Trust or Beneficiary Deed

Property in a revocable living trust or passing by a beneficiary deed steps up the same way probate property does. You get probate avoidance without giving up the tax benefit. Colorado probate is already inexpensive, so run the numbers with our Colorado probate fee calculator and the Colorado probate cost guide before you decide.

Mind the Surviving Spouse's Mixed Basis

Because Colorado is a common-law state, only the decedent's half of jointly owned property steps up. Married couples should think about how property is titled, whether one spouse holds most of the appreciated assets, and whether a trust structure could capture more of the step-up for both halves.

Document the Date-of-Death Value

The IRS can challenge a claimed basis. Protect yourself by ordering appraisals at the time of death, keeping the probate inventory and valuation, and holding your sale-related expense records.

Record-Keeping That Protects Your Basis

Good records are how you defend the stepped-up basis if anyone asks.

At the Time of Inheritance

• Date-of-death appraisals for real estate
• Brokerage statements showing date-of-death values
• The estate inventory filed with the district court
• Business valuations
• Appraisals of higher-value personal property

During Ownership

• Records of each capital improvement
• Property tax and insurance records
• Repair and maintenance records (to separate improvements from repairs)

At the Time of Sale

• Settlement statements (the Closing Disclosure)
• Real estate commission receipts
• Legal and accounting fees
• Other selling expenses

Keep these for at least three years after you file the return that reports the sale, though holding them longer is smart.

Frequently Asked Questions

Does Colorado have its own estate or inheritance tax?

No. There is no Colorado estate or inheritance tax. Colorado's estate tax statute (C.R.S. 39-23.5-103) sets the tax equal to the old federal state death tax credit, which federal law phased out to zero for deaths after 2004. So no Colorado estate tax is due and no state return is required. Only the federal estate tax can apply, and only to estates above the federal exemption.

How does Colorado tax capital gains on inherited property?

Colorado has no separate capital gains tax. A gain flows through your federal taxable income and is taxed at Colorado's flat individual income tax rate of 4.40% (C.R.S. 39-22-104). A TABOR surplus refund can temporarily lower that rate in some years, to as low as 4.25% (C.R.S. 39-22-627), so confirm the rate for the year you sell. You still owe federal capital gains tax on any gain above your stepped-up basis.

If my spouse and I own our Denver home together, does the whole house step up when one of us dies?

No. Colorado is a common-law (separate property) state, not a community property state. When the first spouse dies, only that spouse's half of a jointly owned home steps up to fair market value. The surviving spouse's half keeps its original basis. There is no double step-up. Community property states are the ones where the full property can step up on the first death.

Does the step-up still apply if we avoid probate with a beneficiary deed or a living trust?

Yes. The step-up comes from federal law and applies to property acquired from a decedent whether it passes through probate or not. Real estate transferred by a Colorado beneficiary deed, assets held in a revocable living trust, joint tenancy interests, and payable-on-death accounts all step up to the date-of-death value for the share the decedent owned.

Do inherited retirement accounts get a step-up?

No. Traditional IRAs, 401(k)s, and similar tax-deferred accounts are income in respect of a decedent. They do not receive a basis step-up, and withdrawals are taxed as ordinary income to the beneficiary. Roth accounts follow their own distribution rules. The step-up is for capital assets like real estate and taxable brokerage holdings.

What happens if the inherited property lost value?

The adjustment runs both directions. If an asset was worth less at the date of death than the decedent paid for it, the basis steps down to that lower value. The heir cannot claim the paper loss the decedent could have taken. This is why holding a depreciated asset until death can waste a loss that a lifetime sale would have captured.

Related Colorado Guides

• Selling Inherited Property in Colorado
• Colorado Probate Guide
• Colorado Revocable Living Trust
• Colorado Beneficiary Deed (Transfer-on-Death Deed)
• How to Avoid Probate in Colorado
• Colorado Probate Cost Calculator

---

Sources

Last Updated: June 2026. This guide provides general information about the step-up in basis for Colorado inherited property. Tax situations vary by individual. Consult a tax professional or CPA about your specific facts. It is not legal advice.