Colorado Inheritance Tax: What Should Residents Know?

Inheritance can be a meaningful bridge between generations, allowing families to preserve wealth and cherished possessions. However, receiving or transferring inherited property can be challenging when you factor in the legal and administrative obligations that come with it. 

In this post, we’ll examine inheritance broadly in Colorado and offer guidance on key areas like taxes, legal structures, and long-term preparation. Whether you’re hoping to protect your life’s work for your loved ones or wish to manage a windfall responsibly, it’s important to understand the core concepts at play. 

Clarifying the Difference Between Inheritance Tax and Estate Tax

An inheritance tax requires each person receiving money or property from someone who has died to pay taxes based on their share. This often depends on how closely related they were to the person who passed away. Sometimes, close family members might be eligible for special exemptions or lower rates.

By contrast, an estate tax focuses on the entire value of the deceased’s assets. The estate pays any owed taxes before dividing the remaining property among the heirs. The main distinction is who is responsible for the tax liability—either each heir individually (inheritance tax) or the estate as a whole (estate tax). Knowing this difference helps everyone plan, handle paperwork properly, and avoid unexpected expenses.

Does Colorado Have an Inheritance Tax?

Colorado doesn’t presently impose an inheritance tax. However, the same cannot be said for locations elsewhere in the United States.

A state-level inheritance tax only applies in certain regions, including:1

• Maryland
• Pennsylvania
• New Jersey
• Kentucky
• Nebraska

If you come into property or funds from one of these states, you may be responsible for inheritance taxes determined by that location’s regulations—even if you live in Colorado. The tax rates in states that do have inheritance taxes can vary significantly, with typical ranges spanning 10% to 18%.2 

Does Colorado Have an Estate Tax?

Colorado does not impose an estate tax. However, if the estate’s value surpasses certain federal limits, federal estate taxes can still come into play. Because tax laws and exemptions can shift at both the state and federal levels, monitoring any changes is wise. Staying informed helps avoid surprises and ensures you’re prepared for any obligations that might arise when passing on or receiving significant assets.

Federal Tax Considerations for Coloradans

Colorado residents need to stay aware of guidelines at the federal level. Federal policies set the stage for whether you must pay estate taxes once your holdings surpass a defined threshold. Below, we’ll review some of the most important considerations. 

Federal Estate Tax Exemptions and Rates

Currently, an estate’s size determines whether federal estate taxes will apply. In 2025, each individual’s combined gift and estate tax exemption is expected to be $13.99 million; for married couples, that figure doubles to around $27.98 million.3

Anything above those figures could face taxes ranging from roughly 18% to 40%.4 This taxation applies strictly to the portion of the estate value that exceeds the exemption amount.

Gift Taxes and Lifetime Exemptions

Federal law unifies estate and gift taxes. Any large transfers you make while alive chip away at your lifetime exemption. You get an annual gift exclusion—$19,000 per recipient in 2025—without affecting that lifetime limit.5 

But gifts beyond that count toward the same $13.99 million total, so you’ll want to strategize carefully. Strategically timing gifts can reduce your estate’s taxable portion when it eventually transfers to heirs.

Potential Future Changes

It’s worth noting that the unusually high exemptions we see now could revert to more modest amounts in 2026. Without new legislation, each individual’s exclusion will drop to around $7 million, and married couples will see their combined exclusion land near $14 million.6 This underscores the importance of routinely updating your plans; laws change, and your estate strategy may need to adapt accordingly.

Capital Gains Taxes on Inherited Property in Colorado

When you inherit real estate or other assets in Colorado and later decide to sell, you’ll likely have to consider capital gains taxes. Fortunately, the stepped-up basis provision can substantially reduce what you might owe. That’s because the asset’s basis resets to its fair market value when the previous owner passes away, ensuring that gains accrued before the inheritance are not taxed to the beneficiary.

However, it’s imperative to obtain a professional valuation or appraisal close to the time of the previous owner’s passing to establish and document the new cost basis. Doing so helps clarify your potential tax liability when you sell and can prevent disputes with tax authorities down the line.

Short-Term vs. Long-Term

If you hold an inherited asset for under one year before selling, the resulting gain is taxed at short-term rates, which align with your ordinary income tax bracket. Should you keep the property longer, you may benefit from long-term capital gains rates, which are more favorable for many taxpayers.

State and Federal Considerations

Colorado taxes capital gains at the income rate, which for 2025 means 4.4%.7  Additionally, federal tax obligations are also a concern. Federal short-term capital gains rates typically fall between 10% and 37%, while long-term rates vary between 0% and 20%.8 

High-income individuals may also contend with a 3.8% net investment income tax, potentially elevating the effective rate.8 Timing the sale to align with advantageous market conditions and your personal tax situation can help preserve more of your gains.

Please Note: Monitoring your holding period and checking current tax brackets are good practices when contemplating the sale of inherited property, especially if you plan to keep it for a while, as part of a broader estate planning strategy.

Other Tax Considerations

While it’s true that there is no direct Colorado estate tax or inheritance tax, there are still multiple taxes in Colorado and administrative processes that new property owners should keep on their radar. The rules for property assessments and other legal requirements can become particularly relevant when you inherit assets.

If your family member held assets in locations like Maryland or another jurisdiction with an active inheritance or estate tax, you might face obligations in those areas. Remember, the location of the inherited property may trigger compliance with those external laws. Checking each relevant state’s rules can help steer clear of unintended penalties.

Colorado will also place an income tax on revenue from inherited assets. Federal guidelines will also apply if the assets generate income—such as rental proceeds or dividends. Additionally, inheriting a home or land may initiate a reevaluation by the local assessor. If the property has increased in market value, you might see a bump in your annual property taxes. 

Ways to Lower Your Tax Liabilities

Skillful estate planning is not merely about abiding by current legislation; it often involves reducing your overall exposure to taxes and fees. Below are established tactics Coloradans frequently employ to manage or minimize their taxes in Colorado and beyond:

Leveraging Exclusions: By strategically employing the annual gift tax exclusion and your lifetime gift tax exemption, you can effectively pare down your taxable estate. Making yearly gifts below these thresholds keeps you clear of immediate gift taxes while gradually reducing the portion of your estate that could be taxed down the road. Beyond easing potential estate tax burdens, this method allows your family and friends to benefit from your generosity during your lifetime.

Trusts: Trusts can help control how and when heirs access resources. Options include revocable trusts, which you can adjust during your lifetime, and irrevocable trusts, which remove assets from your estate’s valuation under certain conditions. These structures can also protect assets from creditors and streamline the transfer process.

Life Insurance: Some families obtain life insurance policies designed to cover outstanding taxes or expenses, ensuring that heirs aren’t forced to sell property quickly to raise cash. An irrevocable life insurance trust (ILIT) might be used to keep policy proceeds out of your taxable estate, positioning them as a separate resource.

Philanthropy: If giving back matters, consider designating a portion of your estate for charitable causes. You can leverage various strategies—such as charitable remainder trusts or donor-advised funds—to achieve your giving objectives to benefit you and the organizations you support. Because gifts to qualified nonprofits are typically exempt from estate taxes, this route can also help reduce the portion of your assets that might exceed federal tax thresholds.

Family-Limited Partnerships: Setting up a family-limited partnership (FLP) can be a productive way to pass down a business while reducing overall taxation. Through an FLP, you can transfer ownership shares to heirs—often at a discounted value—yet maintain management control. This structure helps lower tax liability since the discounted shares generally reduce the portion of the company’s value subject to estate or gift taxes. In addition, FLPs can streamline how profits and decision-making power are distributed, promoting a smoother transition of control and enhancing the long-term viability of the family business.

Please Note: These suggestions don’t exhaust all possibilities. Every person’s situation is distinct, so you may benefit from a custom mix of approaches—or from exploring additional tools beyond what’s highlighted here.

Steps to Take When Inheriting Assets in Colorado

Receiving valuable assets might be exciting and overwhelming, especially if you lack familiarity with administrative details. Even without a formal estate tax at the state level, dealing with documentation, potential sales, and estate updates is still part of the process.

Assemble Important Records: Gather property deeds, titles, bank statements, insurance policies, appraisals, and relevant legal documents. A comprehensive paper trail will expedite any tax or legal filings, and it’s wise to keep digital backups in case of physical loss or damage.

Evaluate Sale Timing: If you inherit an asset—whether real estate or a portfolio—and plan to liquidate it, the timing of that sale can influence the taxes owed. Selling swiftly can minimize gains if the property’s market value hasn’t climbed much, whereas waiting could trigger higher capital gains but potentially yield more profit. A financial advisor can help you weigh these trade-offs.

Check Outstanding Debts and Liabilities: Even if Colorado doesn’t impose a separate estate tax, the deceased may have left unpaid debts, mortgages, or credit card balances. You may need to ensure these obligations are settled before any inheritance is finalized.

Review Insurance Coverage: Inheriting a home or other property often means updating or securing insurance in your name. If the previous owner had a policy, confirm that it remains valid after the title changes hands.

Revise Your Personal Estate Documents: Inheriting substantial assets may mean your will, trust, or beneficiary designations need updating. Adding new property to your estate could push you closer to federal thresholds, so it’s prudent to revisit your directives and ensure they reflect your objectives.

Making the Most of Your Inheritance

Inheriting assets can open new doors for financial growth and security, yet deciding how best to use this windfall often requires careful thought. Beyond addressing immediate obligations or aspirations, consider how your decisions could support your long-term goals and personal values. Below are some potential strategies to guide you as you put inherited resources to work:

Pay Down High-Interest Debt: Eliminating credit card balances or loans with steep interest rates can free up more of your monthly budget for saving and investing. By reducing the amount you owe now, you’ll position yourself for greater financial stability in the years ahead.

Build an Emergency Fund: For those who have yet to build a solid emergency reserve—often recommended at three to six months’ worth of living costs—an inheritance can offer a valuable infusion into your savings. Establishing this financial cushion provides a greater sense of security and reduces the likelihood of taking on new debt when unplanned expenses arise.

Invest for Growth: Traditional stock, bond, or mutual fund portfolios might be a straightforward way to build wealth over time. However, evaluating how each investment choice aligns with your risk tolerance and overall goals, including retirement or other major life plans, is wise.

Explore Sustainable Investing: If you’re looking to align your money with causes you care about—like environmental protection or social equity—sustainable or impact investments could be a worthwhile avenue. We’ll dive deeper into this topic next month, exploring specific approaches to help you make a positive difference while pursuing financial returns.

Contribute to Education or Retirement Accounts: Consider placing a portion of your inheritance into 529 plans for future education expenses or maxing out contributions to IRAs, 401(k)s, or other tax-advantaged retirement vehicles. This can help your inheritance to continue working for you and your heirs.

Let Us Help You Further

Inheritance can extend your hard-earned wealth into the future, but the details can be complicated. This overview covered key differences between inheritance and estate taxes, Colorado’s stance on both, major federal considerations, potential capital gains impacts, and practical strategies—including trusts, gifting, and philanthropy—when inheriting property.

A well-coordinated plan can help anticipate potential tax considerations. Our financial advisory team works with clients’ accountants and legal professionals to address the nuances of multi-jurisdictional estates, support compliance with changing laws, and help refine tax outcomes. From crafting a brand-new estate plan to refining the one you already have, our commitment is to work with your other professionals to ensure the legacy you’ve created consists of long-term financial strategies for future generations. 

If you’re ready to begin or want a second opinion on your current plan, Schedule a no-obligation initial consultation with our team. We’ll outline tangible steps to preserve wealth and clarify an otherwise complex process. 

Resources:

1. https://www.nolo.com/legal-encyclopedia/state-inheritance-taxes.html
2. https://www.bankrate.com/taxes/what-is-inheritance-tax/
3. https://www.morganlewis.com/pubs/2024/10/irs-announces-increased-gift-and-estate-tax-exemption-amounts-for-2025#:~:text=In%20addition%2C%20the%20estate%20and,federal%20estate%20or%20gift%20tax.
4. https://www.usbank.com/wealth-management/financial-perspectives/trust-and-estate-planning/estate-taxes.html
5. https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025
6. https://www.schwab.com/learn/story/countdown-gift-and-estate-tax-exemptions
7. https://leg.colorado.gov/bills/hb24-1065#:~:text=For%20income%20tax%20years%20commencing,from%204.40%25%20to%204.0%25.
8. https://www.kiplinger.com/taxes/capital-gains-tax/602224/capital-gains-tax-rates#:~:text=Short%2Dterm%20capital%20gains%20are,from%2010%25%20to%2037%25