Your father bought the house in 1979 for $68,000.
It sold last month for $740,000.
The tax on that gain is close to zero.
This is the one part of the tax code everyone agrees is generous.
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When someone dies, most of what they owned gets a new cost basis: its value on the date of death. The $68,000 house becomes a $740,000 house in the eyes of the IRS, and the heirs who sell it for $740,000 have no gain. Forty years of appreciation are never taxed. That is the step-up in basis, and it applies to houses, land, stock, mutual funds, a business interest, and almost anything else that was in the estate.
It does not apply to everything. Retirement accounts, annuities and savings bonds carry their tax to the heirs. Property given away before death carries the giver’s old basis, which is why a gift of the house to the kids in 2020 is one of the more expensive estate plans available. Below is how the rule works, where it stops, and what to do in the months after a death so the step-up is actually recorded somewhere.
Property you inherit takes a basis equal to its fair market value on the date of death. Not what the decedent paid, not what the county assessor says, not what it was worth when the will was read. The date of death. (An executor filing an estate tax return can elect the value six months later instead, but with the 2026 estate exemption at $15 million per person, almost no one files that return.)
Two consequences follow. Any gain that built up during the decedent’s life disappears. And your holding period is automatically long-term, so if you sell the week after the funeral, any gain or loss is long-term. The step-up also works in reverse: property that lost value steps down, and the decedent’s loss disappears too, which is an argument for a dying person to sell losers and keep winners.
The rule covers everything that was included in the estate for estate-tax purposes, whether or not a return was filed: the house, brokerage accounts, land, a business, collectibles, a car. Community-property states give the surviving spouse a full step-up on the whole property; Colorado is not one, which matters in the next section.
↑ Back to topIn Colorado, a married couple’s jointly owned house or brokerage account is treated as half owned by each. When one spouse dies, the decedent’s half steps up to date-of-death value; the survivor’s half keeps its original basis. A house bought for $200,000, worth $800,000 at the first death, has a new basis of $500,000: the survivor’s $100,000 plus the stepped-up $400,000.
This is the single most important timing rule in the section. A surviving spouse who sells that house has $300,000 of gain and a $250,000 exclusion (or $500,000 if the sale closes within two years of the death). A couple who sold the same house the year before one of them died would have had $600,000 of gain and the same $500,000 exclusion. The difference, taxed at 15%, is around $15,000 federal plus Colorado. When a spouse is seriously ill and a sale is being considered, the order of events has a price.
The same half step-up applies to jointly held stock. The broker needs to be told, in writing, with the date of death; otherwise the account keeps carrying the couple’s original cost on every share, and the survivor overpays on every sale for the rest of their life. We have seen that go on for a decade.
↑ Back to topA joint account between a parent and an adult child is different from a joint account between spouses. The step-up follows the money: whatever share the decedent contributed is included in the estate and steps up; the child’s own contributions don’t. A parent who added a daughter to the brokerage account “for convenience” and funded all of it gets a full step-up for the daughter at death, because the parent contributed 100%. A parent who added the daughter to the deed of the house as a half-owner made a gift of half the house, and that half carries the parent’s old basis forever. Same intention, opposite result.
A Colorado beneficiary deed (transfer-on-death deed) avoids both problems. The parent keeps full ownership until death, the house passes to the named beneficiary without probate, and the whole house steps up. For a parent who wants the house to go to the kids without a trust, it is usually the right instrument, and a lawyer prepares it for a few hundred dollars. Payable-on-death and transfer-on-death designations on bank and brokerage accounts work the same way.
↑ Back to topSo the house I was going to give the kids to “keep it simple” would have cost them a hundred thousand dollars in tax, and the IRA I thought was the clean one is the one that’s going to be taxed twice. I’d like the names of these rules switched.
↑ Back to topA revocable living trust is invisible for this purpose. The grantor owned the property until death, it is in the estate, and everything in it steps up. Most trusts people set up to avoid probate are revocable, and the step-up is not affected.
An irrevocable trust is where it gets technical. Property that was moved out of the estate (to reduce estate tax, or to qualify for Medicaid) is generally not in the estate and gets no step-up at the grantor’s death. Some irrevocable trusts are drafted to keep the property in the estate anyway, through a retained interest or a power the grantor keeps, and those do step up. The only way to know is to read the trust document, which is a question for the attorney who drafted it and for us before the trust sells anything. With the estate exemption at $15 million, most families are better served by keeping appreciated property in the estate for the step-up than by moving it out to avoid an estate tax they will never owe.
A life estate, formal or implied, where a parent deeds the house to a child but keeps living there rent-free until death, keeps the house in the parent’s estate, and the child gets a full step-up. That is often an accidental good result from a deed that was done for the wrong reasons.
↑ Back to topGet the value documented. A date-of-death appraisal by a licensed appraiser, done within a few months of the death, is the standard. A broker’s comparative market analysis is acceptable in practice. The county assessor’s value is not an appraisal and is usually low, which costs you basis. The appraisal is a few hundred dollars and it is the only document that proves the number you will put on a return years from now.
Selling costs reduce the gain. Commissions, title, closing costs. An inherited house appraised at $740,000 and sold six months later for $745,000 with $45,000 of selling costs has a $40,000 loss. That loss is deductible, $3,000 a year against ordinary income with the rest carried forward, as long as nobody in the family used the house as a personal residence after the death. The estate can take the loss if the estate sells; the heirs can if it was distributed to them first. If one of the heirs moves in and sells later, it becomes personal-use property and a loss is not deductible, but the $250,000 exclusion may apply after two years of residence.
The 1099-S from the closing reports the gross sale price to the IRS. The sale must be reported even when there is no gain; a $745,000 sale with nothing on the return draws a letter asking about $745,000 of income.
↑ Back to topMother bought the house in 1986 for $112,000 and put $60,000 of improvements into it. She died in February 2026. A beneficiary deed names the three children. Appraisal at date of death: $810,000. They sell in August for $825,000 with $49,500 of commissions and closing costs. None of them lived there.
Basis: $810,000, $270,000 each. The $172,000 she paid is irrelevant. Amount realized: $825,000 less $49,500 = $775,500. Result: a $34,500 long-term capital loss, $11,500 to each sibling, each deductible against gains or at $3,000 a year.
If instead mother had deeded the house to them in 2019, when it was worth $520,000, to “avoid probate”: their basis would be her $172,000, the gain $603,500, and the tax at 15% plus Colorado roughly $117,000. The beneficiary deed cost $300.
Her IRA of $210,000, also left to the three: no step-up; $70,000 of taxable income to each, spread over up to ten years.
Colorado has no estate tax and no inheritance tax. Nothing is owed to the state because someone died, at any size of estate. Colorado’s income tax follows the federal basis rules, so the step-up carries through and a sale of inherited property is taxed, if at all, at 4.40% on the federal gain. The beneficiary deed is a Colorado statute (C.R.S. 15-15-401 and following) and is recorded with the county clerk during the owner’s life; it can be revoked by recording a new one. Colorado’s probate process for a house passing under a will is not onerous, but the deed avoids it entirely for a few hundred dollars, and for a parent whose main asset is the house it is usually the right answer.
↑ Back to topOnly on her half. Adding you to the deed was a gift of half the house, and your half keeps her original basis. If it hasn’t been done yet, a beneficiary deed instead of a joint deed gives you a full step-up and avoids probate just as well.
The tax answer: within two years of his death you still get the $500,000 exclusion, and his half of the house already stepped up, so most or all of the gain is likely covered. Beyond two years the exclusion drops to $250,000. The rest of the decision isn’t a tax question.
Yes, if no heir used it as a residence after the death. It is a long-term capital loss, deductible against capital gains and then $3,000 a year against other income, carried forward until used.
No. Colorado has neither an estate tax nor an inheritance tax. The only Colorado tax is income tax at 4.40% on any gain when inherited property is later sold, and with the step-up that gain is usually small.
For the Tax Shop desk · forms, code sections, and the things that get missed
Two things in the months after a death, and both are cheap: get the appraisal, and write to the broker with the date of death so the basis on every holding is reset. Two things while a parent is still living, and both are cheaper than the alternative: don’t deed the house to the kids, and ask about a beneficiary deed instead. If a spouse is seriously ill and a sale is on the table, call before the listing agreement is signed. The step-up is the most generous rule in the code, and it only works if someone records it.
Call 303-734-1040 or stop by the office in Lone Tree. We’ve been reading the footnotes for Douglas County and the Denver area since 1969.
Figures reflect the 2026 tax year as currently published and are rounded for readability. Items marked (verify) are to be confirmed against IRS or Colorado DOR sources before the figures freeze in December. Last updated October 15, 2026.
