Colorado does not have an inheritance tax, and the state’s own estate tax has been effectively zero since 2005. If you inherit money, a house, investments, or other property from a Colorado estate, you owe nothing to the state of Colorado just for receiving it. Federal rules are a separate question, and they can still matter in three specific situations: very large estates, inherited retirement accounts, and the tax basis you use if you later sell what you inherited.
No State Tax on What You Inherit
Colorado is one of the majority of states that charges no inheritance tax. Beneficiaries who receive cash, real estate, investments, or other property from a Colorado estate owe nothing to the state based on the inheritance itself. Colorado’s estate tax statute still sits on the books at Title 39, Article 23.5 of the Colorado Revised Statutes, but the tax is tied to a federal state death tax credit that Congress phased down to zero between 2002 and 2005. In practical terms, Colorado has collected no estate tax since then.
Only five states currently impose an inheritance tax at all: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Rates in those states run from roughly 1% to 16% depending on how closely the beneficiary is related to the person who died. None of that reaches a Colorado estate.
When Federal Estate Tax Can Still Apply
The federal estate tax is paid by the estate before assets are distributed, not by beneficiaries individually. For deaths in 2026, the basic exclusion amount is $15 million per person, a figure set by the One, Big, Beautiful Bill Act signed into law on July 4, 2025.1Internal Revenue Service. What’s New — Estate and Gift Tax Married couples who use portability can effectively shield up to $30 million combined. Any value above the exclusion is taxed at graduated rates starting at 18% and reaching 40% on amounts more than $1 million over the threshold.2Internal Revenue Service. Estate Tax
If an estate does owe federal tax, the executor files IRS Form 706 within nine months of the date of death. A six-month extension is available by filing Form 4768 before the original deadline, but the tax itself is still due at the nine-month mark.3Internal Revenue Service. Instructions for Form 706 Missing the filing deadline costs 5% of the unpaid tax per month, up to 25%, and a separate late-payment penalty of 0.5% per month runs on top of that, also capped at 25%. Interest compounds on both.4Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax
For estates where a closely held business makes up more than 35% of the gross estate, Section 6166 of the Internal Revenue Code allows the executor to defer payment for up to five years and then pay in ten annual installments, stretching the schedule as long as 15 years from the original due date.5Office of the Law Revision Counsel. 26 USC 6166 – Extension of Time for Payment of Estate Tax Where Estate Consists Largely of Interest in Closely Held Business
Deductions reduce the taxable estate before any of this applies. Funeral expenses, outstanding debts, mortgages, administration costs, and charitable bequests all come off the top.2Internal Revenue Service. Estate Tax
Stepped-Up Basis When You Sell Inherited Property
This is the rule that matters most for Colorado beneficiaries who inherit a house or appreciated stock. Under federal law, inherited assets receive a “stepped-up” basis equal to their fair market value on the date the person died, regardless of what the original owner paid.6Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If your parent bought a home for $150,000 and it was worth $500,000 on their date of death, your basis is $500,000. Sell it the next month for $505,000 and you owe capital gains tax on $5,000, not $355,000.
The step-up applies to stocks, real estate, and most other appreciated property. If the estate files Form 706, the executor may instead elect an alternate valuation date six months after death, which can help if asset values drop in that window.7Internal Revenue Service. Basis of Assets
One exception is worth knowing. If you gave appreciated property to the decedent within one year before death and then inherited it back, there is no step-up. You take the decedent’s adjusted basis, which was your original basis. The rule exists to stop people from gifting low-basis assets to a dying relative to capture the step-up.
For estates required to file a federal estate tax return, beneficiaries get a Schedule A from Form 8971 showing the estate tax value of the property they received. When you eventually sell, your reported basis has to match that figure. Overstating basis to shrink your capital gain can trigger an accuracy-related penalty.8Internal Revenue Service. Gifts and Inheritances
Inherited Retirement Accounts Are the One Place You Will Owe Tax
Inherited traditional IRAs and 401(k)s are the main exception to the “no tax on inheritances” rule for most Colorado beneficiaries. Those accounts were funded with pre-tax dollars, so withdrawals are taxed as ordinary income at your federal and Colorado income tax rates. Inherited Roth IRAs are different: qualified distributions stay tax-free because the original contributions were already taxed.
For account owners who died in 2020 or later, how fast you have to pull money out depends on whether you qualify as an “eligible designated beneficiary.” That category covers a surviving spouse, a minor child of the account holder, a disabled or chronically ill person, or anyone no more than ten years younger than the deceased. Eligible designated beneficiaries can stretch distributions over their own life expectancy.9Internal Revenue Service. Retirement Topics – Beneficiary
Everyone else, including most adult children, has to empty the account by the end of the tenth year after the account holder’s death. Proposed IRS regulations also indicate that when the original owner had already begun taking required minimum distributions, beneficiaries subject to the ten-year rule must take annual distributions during that stretch, not just one lump sum in year ten. Final regulations were anticipated to take effect for calendar years beginning on or after January 1, 2025. Skipping a required annual distribution can trigger a 25% excise tax on the amount you should have withdrawn.
The practical effect on a large account is significant. A $500,000 inherited traditional IRA drained evenly over ten years adds roughly $50,000 to your taxable income every year. If you have any flexibility, taking larger withdrawals in lower-income years and smaller ones in higher-income years helps keep you out of higher brackets.
Spousal Transfers and Portability
Two provisions all but erase federal estate tax for married couples. The unlimited marital deduction lets a deceased spouse pass any amount of property to a surviving spouse with no estate tax, provided the survivor is a U.S. citizen.10Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse When the surviving spouse is not a citizen, the deduction only works if the assets go into a qualified domestic trust.
Portability lets a surviving spouse claim the deceased spouse’s unused exclusion. If the first spouse to die used only $3 million of their $15 million exclusion, the survivor can add the remaining $12 million to their own, for a combined $27 million. The executor has to file Form 706 to elect portability, even when the estate is nowhere near the filing threshold. Miss that filing and the unused exclusion is gone for good.11Internal Revenue Service. Frequently Asked Questions on Estate Taxes
If You Inherit From an Out-of-State Estate
Colorado’s favorable treatment only covers estates administered in Colorado. Inheritance tax follows the decedent’s state of residence, not the beneficiary’s. A Colorado resident inheriting from a Pennsylvania estate, for example, could owe Pennsylvania inheritance tax at rates up to 15% depending on the family relationship, even though Colorado itself charges nothing.
When the deceased owned real property in more than one state, each state where property sits may require its own ancillary probate proceeding, with that state’s own rules, timelines, and fees. Multi-state estates often need legal counsel in each jurisdiction, which is a cost worth planning for early.