One of the first questions families ask me after a parent passes is, “If we sell Mom’s house, are we going to get hit with a huge tax bill?” It’s a fair worry. Many Colorado homes bought decades ago are now worth five or ten times what was paid for them.
The good news: in most cases, heirs who sell an inherited house owe little or no capital gains tax. That’s because of a rule called the stepped-up basis. Here’s how it works, with a real-world example, plus the situations where it gets more complicated.
Please note: I’m a real estate broker, not a CPA, attorney or tax advisor. Tax rules change and every estate is different, so confirm your numbers with your tax professional.
What “stepped-up basis” means
Your “basis” is the starting value the IRS uses to figure your profit when you sell. Normally, basis is what you paid for a property plus improvements.
When you inherit a home, the basis generally resets, or “steps up,” to the home’s fair market value on the date of the owner’s death. That rule comes from the IRS (see Publication 551), and it applies whether or not an estate tax return is filed. The appreciation that built up during your parent’s lifetime is never taxed.
Two more rules work in heirs’ favor:
- It’s automatically long-term. Inherited property is treated as held long-term, even if you sell a month after the death. That means the lower federal capital gains rates (0%, 15% or 20%) apply, not ordinary income rates.
- Selling costs reduce your gain. Commissions, title fees and other closing costs are subtracted from the sale price before any gain is figured. See how much it costs to sell a house in Colorado.
An example: Mom’s house in Lakewood
Say your mother bought her Lakewood home in 1985 for $90,000. When she passed away, an appraisal valued it at $650,000. Eight months later, you and your brother sell it for $665,000 and pay $40,000 in commission and closing costs.
| Without the step-up | With the step-up | |
|---|---|---|
| Sale price | $665,000 | $665,000 |
| Minus selling costs | –$40,000 | –$40,000 |
| Minus basis | –$90,000 (1985 price) | –$650,000 (date-of-death value) |
| Taxable gain | $535,000 | $0 (a $25,000 loss) |
Instead of a tax bill on more than half a million dollars, you’d have nothing to pay, and possibly a loss to report. Even if the house had sold for $700,000, the taxable gain would be only about $10,000, split between the two of you.
This is why the date-of-death value matters so much. A solid, well-documented valuation protects you if the IRS ever asks. I explain how to get one in Date-of-Death Home Valuations in Colorado.
Selling soon vs. keeping or renting the house
The step-up works best when you sell within a year or so of the death. After that, any new appreciation is yours, and taxable.
- Sell soon: Little change in value since the date of death usually means little or no gain. Many families also save on carrying costs like property taxes, insurance, utilities and upkeep on a vacant home.
- Keep it as a rental: You can depreciate the home starting from the stepped-up value. But when you sell, the depreciation you took is “recaptured” and taxed, and any appreciation after the death is a capital gain. See should you sell or rent out your Denver house.
- Move in yourself: If an heir makes the home their main residence for at least two of the five years before selling, the usual home-sale exclusion may apply: up to $250,000 of gain tax-free ($500,000 for married couples filing jointly).
Not sure which path fits? My post on the 4 options for an inherited house in Colorado walks through each one.
Special cases to know about
- Joint tenancy with a spouse. When a married couple owns the home as joint tenants, the surviving spouse usually gets a step-up on only the half owned by the spouse who died. Their own half keeps its original basis. Colorado is not a community property state, so the full step-up some states allow doesn’t apply here.
- Joint tenancy with a child or other non-spouse. If a parent added a child to the deed, the step-up generally applies only to the portion the parent paid for. Adding a child to the title during life can cost them a big part of the tax benefit.
- Gifts before death. If a parent deeds the house to a child while still living, there’s no step-up. The child takes on the parent’s original basis. A transfer to the parent from an heir within one year before death also doesn’t qualify.
- Trusts. A home in a revocable living trust usually gets the full step-up, because it’s still part of the estate. Some irrevocable trusts don’t. See selling a house in a trust in Colorado.
- Multiple heirs. Each heir reports their share of the sale. See selling an inherited house with multiple heirs.
- Colorado state tax. Colorado has no inheritance tax and no state estate tax. Any taxable gain is included in your Colorado income and taxed at the state’s flat rate (4.4% for recent tax years; check the current rate with your tax preparer).
Selling a home you lived in yourself, not one you inherited? Read Do You Pay Capital Gains Tax When Selling a House in Colorado?
Next steps for Colorado heirs
- Get a date-of-death valuation. Use a licensed appraiser, or a broker’s market analysis dated as close to the date of death as possible. Keep it with your estate records.
- Keep every receipt. Track repairs, cleanout costs and selling expenses. See how to clean out a parent’s home.
- Talk to a CPA before you decide. Selling, renting and moving in each lead to different tax results.
- Know where you are in probate. The Personal Representative usually needs authority before listing the home. Read selling a home in probate in Colorado.
Frequently asked questions
Do I pay taxes when I inherit a house in Colorado?
No. Colorado has no inheritance tax, and simply receiving the house isn’t taxable income. Taxes come into play only when you sell, and then only on gain above the date-of-death value.
What if I sell the inherited house for less than it was worth at death?
You may have a capital loss. If no heir used the home personally, that loss may be deductible. Ask your CPA.
Does the house have to go through probate to get the step-up?
No. The step-up applies to property passed through probate, a living trust, a beneficiary deed or survivorship.
How do I prove the date-of-death value?
A written appraisal effective as of the date of death is the strongest proof. A broker’s comparative market analysis can help support it.
We can help
We provide free date-of-death market analyses and net-proceeds estimates you can take to your CPA. Visit our probate page, call us at (720) 403-2940, or reach out here.
Need help clearing out the home? Our sister company, Herzog Estate Services, handles clean-outs, estate sales, donations, hauling, repairs and cleaning.