Colorado Estate Tax: What You Need To Know

An estate tax is a tax on the transfer of a person’s taxable estate at death. It is generally based on the fair market value of the person’s assets, reduced by applicable deductions and other adjustments.

This post aims to demystify estate taxes, focusing on their application both federally and within Colorado. We hope you’ll gain insight into what estate taxes are, how they differ from inheritance taxes, and strategies that may help reduce your estate tax liability.

What Is An Estate Tax?

An estate tax applies to the transfer of a deceased individual’s taxable estate before assets are distributed to heirs.

The value of an estate generally begins with the fair market value of assets such as property, investments, cash, business interests, and personal belongings. Applicable deductions and other adjustments are then taken into account in determining the taxable estate.

An estate can encompass assets such as real estate, stocks, bonds, business interests, retirement funds, and valuable personal items like art and jewelry. For example, an estate might include a family home, investment properties, shares in local businesses, and various personal investments.

At the federal level, estate tax thresholds and rates can change according to legislation. For 2026, the federal basic exclusion amount is $15 million per individual. For married couples, a surviving spouse may also be able to use a deceased spouse’s unused exclusion if a portability election is properly made. Estates above the applicable exemption may be subject to federal estate tax, with a top rate of 40%.[1][2] Staying updated on these thresholds is important for effective planning.

Please Note: Federal tax legislation enacted in 2025 (Public Law 119-21) increased the basic exclusion amount to $15 million per individual beginning in 2026 and removed the previously scheduled reduction. Under current law, the amount is indexed for inflation going forward.[3]

Does Colorado Have An Estate Tax?

Colorado does not impose an estate tax at the state level. At Colorado Capital Management, we understand that estate taxes can be a challenging aspect of your financial planning.

Previously, Colorado had a “pick-up” tax, which allowed the state to collect a portion of the federal estate tax. This tax was effectively eliminated in 2005 when the federal government phased out the state death tax credit.[4] Since then, Colorado has not reinstated a state-level estate tax. However, several other states do impose their own estate taxes.

• Connecticut
• Hawaii
• Illinois
• Maine
• Maryland
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington

Please Note: The District of Columbia also imposes an estate tax.[5] Estate tax rates and exemption levels vary among these jurisdictions.

What’s The Difference Between An Estate Tax And An Inheritance Tax?

An inheritance tax is a tax imposed on assets received by a beneficiary from a deceased individual’s estate. It differs from an estate tax, which is assessed at the estate level before assets are distributed.

The primary difference between an estate tax and an inheritance tax is therefore who is responsible for the tax. Estate taxes are generally paid from the estate before distribution, while inheritance taxes are generally the beneficiary’s responsibility. Inheritance-tax rates may also vary depending on the amount inherited and the beneficiary’s relationship to the person who died.

Proper planning may help reduce the tax burden on both the estate and the heirs, preserving more assets for future generations.

Does Colorado Have An Inheritance Tax?

Colorado does not currently impose an inheritance tax on assets received from a deceased individual’s estate. However, federal estate taxes might still apply if the estate’s value exceeds the applicable federal threshold.

Unlike Colorado, some states do impose their own inheritance taxes. These taxes vary in terms of rates and exemptions.

• New Jersey
• Pennsylvania
• Kentucky
• Maryland
• Nebraska

Please Note: Iowa previously imposed an inheritance tax but fully repealed it effective January 1, 2025, and is no longer included on this list.[6]

What Happens When You Inherit A House In Colorado?

Inheriting a house in Colorado can be both a blessing and a challenge. This significant event brings with it a mix of emotions and responsibilities. Whether you’re planning to keep, sell, or rent out the property, knowing what to expect can help you navigate the process more smoothly.

Steps to Take After Inheriting a House in Colorado

Inheriting a house requires several steps to create a more seamless transition and maintain compliance with legal and financial obligations. Properly managing these steps can help avoid complications and help you make informed decisions about the property.

1. Coordinate with the Executor and Any Other Heirs

Begin by reaching out to the executor to understand the details of the inheritance process. Identify any co-heirs and initiate discussions about the future of the property. It’s important to understand everyone’s preferences—whether they intend to keep, sell, or live in the house. Open communication early on can help avoid conflicts. If disputes arise, consider seeking professional mediation.

2. Assess Outstanding Debts and Liens

Check for any debts or liens against the property. This includes mortgages, tax liens, and other claims. Understanding these financial obligations is necessary for evaluating the house’s overall value and making an informed decision about what to do with the property.

3. Arrange for a Property Appraisal

If the executor hasn’t done this already, it may be wise to obtain an appraisal of the property. Knowing the house’s fair market value can be important when deciding whether to keep, sell, or rent it and when determining the property’s tax basis.

4. Get Professional Help

Legal, tax, and financial professionals can help address the complexities associated with an inheritance, applicable requirements, and the financial implications of the alternatives available to you.

Potential Costs and Taxes Involved

Inheriting a house can come with various costs, such as ongoing property taxes, maintenance expenses, and any existing mortgages. Before deciding whether to sell the property, it’s also important to understand how its value is determined for tax purposes.

When you inherit real estate, the property’s basis is generally adjusted to its fair market value at the time of the original owner’s death. This is commonly referred to as a “step-up” in basis.

For example, if you inherit a house that was originally purchased for $400,000 but is worth $600,000 at the time of inheritance, the property’s basis would generally be $600,000. If you subsequently sell the property for approximately $600,000, there may be little or no taxable capital gain because there has been little or no appreciation beyond the adjusted basis.

If instead you retain the property and its value later increases to $750,000, you could owe capital gains tax on some or all of the appreciation above the $600,000 adjusted basis when you sell, depending on your individual circumstances and how the property was used.

Please Note: In Colorado, capital gains are generally included in income taxed at the state’s flat 4.4% individual income tax rate.[7] At the federal level, inherited property that is a capital asset is generally treated as long-term property regardless of how long you hold it. Any taxable gain is therefore generally subject to long-term capital gains rates, typically 0%, 15%, or 20%, depending on taxable income and other circumstances.[8] For those with higher incomes, the 3.8% Net Investment Income Tax may also apply to certain investment income, including some capital gains.[9]

Options for Managing Inherited Property: Keeping, Selling, or Renting

After inheriting a house, you have several options: you can keep it as a personal residence, sell it, or rent it out for additional income. Each choice has different financial and tax implications, so consider your circumstances and consult with appropriate financial, tax, and legal professionals when evaluating your options.

Strategies To Lower Your Estate Tax Liability

Strategic planning may help reduce potential estate taxes and preserve more wealth for your heirs. Here are some strategies to consider:

• Gifting Assets and Annual Exclusion Limits: Gifting is one way to transfer assets during your lifetime. The annual gift-tax exclusion allows a donor to transfer a certain amount to each recipient each year without using the donor’s lifetime gift and estate tax exemption, provided the gift qualifies for the annual exclusion. In 2026, the annual exclusion is $19,000 per recipient for each donor. A married couple may generally give a combined $38,000 per recipient if each spouse makes a qualifying gift.[10] Over time, gifting may reduce the size of a taxable estate and therefore potentially reduce estate taxes.
• Establishing Trusts for Tax Reduction: Certain trusts, including some irrevocable trusts, may help reduce potential estate taxes by removing assets from the grantor’s taxable estate when they are properly structured. Trusts can also provide control over how and when assets are distributed to beneficiaries. Because trust structures and their tax treatment vary considerably, the appropriate strategy depends on individual circumstances.
• Impact of Charitable Contributions on Estate Taxes: Qualifying charitable gifts made during your lifetime or through your estate plan may reduce the value of your taxable estate and, depending on the circumstances, may qualify for charitable deductions.
• Additional Estate Planning Techniques: Other planning tools may include family limited partnerships (FLPs) and life insurance. FLPs can play a role in transferring and managing family assets, although valuation and tax treatment depend on the specific structure and circumstances. Life insurance may provide liquidity to help meet estate-tax or other estate obligations. Depending on the circumstances, a combination of estate planning strategies may help reduce potential estate-tax exposure.

Please Note: These are high-level strategies, and individual circumstances will ultimately determine the appropriate approach. For example, certain direct payments for education or medical expenses or establishing a donor-advised fund might be appropriate in some situations. Working with an estate planning professional, tax professional, and financial advisor can help you develop a plan tailored to your specific needs and objectives.

Frequently Asked Questions

1. Do I need estate planning if my estate is below the federal estate tax exemption?

Yes. Estate planning is about much more than estate taxes. A good plan can help determine who receives your assets, who can make decisions for you if you become unable to do so, and how smoothly your assets pass to the people and causes you care about.

2. What’s the difference between the annual gift-tax exclusion and the lifetime estate and gift tax exemption?

The annual gift-tax exclusion lets you give a certain amount to each recipient each year without generally using your lifetime exemption. In 2026, that amount is $19,000 per recipient. Gifts above that amount generally reduce your lifetime estate and gift tax exemption rather than creating an immediate gift-tax bill.

3. Are inherited retirement accounts and life insurance taxable?

They are treated differently. Distributions from inherited traditional retirement accounts may be taxable as income and are subject to beneficiary withdrawal rules. Life-insurance proceeds paid at death are generally not taxable as income to the beneficiary, although exceptions can apply.

Let Us Help You With Your Tax Planning In Colorado

At Colorado Capital Management, we can work with you and your estate planning attorney to evaluate how estate-planning strategies fit within your broader financial plan.

Proper estate planning involves more than reducing taxes. It can also help clarify how you want assets managed and transferred, prepare for potential changes in circumstances, and support your broader family and charitable goals.

Our advisors can help you understand the financial implications of strategies such as lifetime gifting, trusts, charitable giving, direct payments for education or medical expenses, and donor-advised funds. We can also coordinate with your estate planning attorney, accountant, and other professional advisors as appropriate.

Estate planning decisions are highly personal and often involve financial, tax, and legal considerations. Our role is to help you understand how these decisions fit within your overall financial plan and work alongside your other professional advisors as you evaluate the alternatives.

Sources:

1. IRS: Estate Tax
2. CNBC Select: What Is Estate Tax and Who Pays It?
3. IRS: Estate and Gift Tax FAQs
4. Federation of Tax Administrators: State Estate and Inheritance Taxes
5. Tax Foundation: State Estate Tax and State Inheritance Tax
6. Iowa Department of Revenue: Iowa Inheritance Tax
7. Colorado Department of Revenue: Individual Income Tax Guide
8. IRS: Topic No. 409, Capital Gains and Losses
9. IRS: Net Investment Income Tax
10. IRS: Estate and Gift Tax FAQs

Editor’s Note: This blog post is for informational purposes only and does not constitute financial, legal, or tax advice. Readers are encouraged to consult with a qualified professional regarding their individual circumstances. Please refer to our firm’s website for full disclosures and important information: CCM Website Disclaimer.