If you’re getting ready to sell a parent’s home in Denver or anywhere else in Colorado, one question almost always comes up before the sign goes in the yard: how much of this is going to get eaten up by capital gains tax?

It’s a fair worry. Home values across the Denver metro have climbed a lot over the past couple decades, and a house your parents bought for $80,000 in the 1980s might be worth $600,000 or more today. On paper, that looks like a massive taxable gain. In practice, the tax bill is usually much smaller than families expect, and sometimes it’s zero. The reason comes down to a rule most people have never heard of: step up in basis.

Here’s how it actually works.

The Rule That Changes Everything: Step Up in Basis

When someone inherits property, the IRS doesn’t calculate the taxable gain based on what the original owner paid for it. Instead, under Section 1014 of the tax code, the property’s cost basis “steps up” to its fair market value on the date the owner died.

In plain terms: if your parent bought their home decades ago for $80,000, and it’s worth $450,000 on the day they pass away, that $450,000 becomes the new starting point for tax purposes, not the original $80,000 purchase price. If the home is then sold shortly after for close to that value, there may be little or no taxable gain at all, because the “gain” only exists on any increase in value between the date of death and the date of sale.

This is different from a parent gifting the home to you while they’re still alive, which generally does not get a stepped up basis and can leave you holding their original, much lower cost basis instead. If a gift is being considered as an alternative to inheriting the home later, it’s worth understanding that trade off before it happens, not after.

Getting a solid date of death valuation, either from a formal appraisal or a detailed comparative market analysis, is worth doing even if the home won’t sell right away. It’s the documentation that protects the stepped up basis if questions ever come up later.

What If the Home Was Sold While Your Parent Was Still Living?

The math is different if your parent sells the home themselves while still alive, rather than family selling it after they pass.

If the home was their primary residence, they may qualify for the IRS Section 121 exclusion, which allows up to $250,000 of gain to be excluded from tax for a single filer, or up to $500,000 for a married couple filing jointly. To qualify, they generally need to have owned and lived in the home as their primary residence for at least two of the five years before the sale.

This exclusion is why many longtime Denver-area homeowners never owe federal capital gains tax on their house at all, even after decades of appreciation. But it only applies to a primary residence sold by the owner. It doesn’t apply the same way if the home has already passed to heirs, and it doesn’t apply to a second home or a rental property.

Colorado’s State Tax Treatment

Colorado doesn’t have a separate capital gains tax rate. Any taxable gain, after federal rules like the step up in basis or the Section 121 exclusion are applied, is simply taxed as ordinary income at Colorado’s flat state income tax rate.

Colorado did once offer an additional state level capital gain subtraction for certain long held property, but that benefit expired after the 2021 tax year and is no longer available. Some older articles and forum posts online still reference it, so it’s worth knowing that it doesn’t apply to a sale happening now.

A Simple Way to Think About It

For most Denver-area families selling a parent’s home after they’ve passed, the sequence usually looks like this. The home’s basis steps up to its value on the date of death. The home is sold, often not long after, for a similar amount. The taxable gain, if there is one, is the difference between the sale price and that stepped up value, minus selling costs like commission and closing fees. Whatever gain remains gets taxed at federal long term capital gains rates, plus Colorado’s flat state rate.

For a home sold close to its date of death value, that remaining taxable gain is often small. It’s not always zero, especially if the home sits on the market for a while and the local market keeps climbing, or if significant time passes between the date of death and the eventual sale. But it’s rarely the frightening number families assume when they first do the mental math using the original 1980s purchase price.

Where Families Get This Wrong

The most common mistake we see is families calculating potential taxes using what their parents originally paid for the home decades ago, instead of the stepped up value. That single miscalculation can make a straightforward sale look like a tax disaster when it isn’t one.

The second most common mistake is not documenting the date of death value at all, and then trying to reconstruct it a year or two later when a tax question comes up. An appraisal, or at minimum a well documented comparative market analysis from a local agent, done close to the date of death, is worth having on file even if you’re not selling right away.

The third is assuming the same rules that applied to a parent selling their own primary residence still apply once the home has passed to heirs. They don’t. Once ownership shifts, the analysis changes, and it’s worth double-checking rather than assuming.

What to Do Next

None of this replaces advice from a CPA or tax professional who can look at your family’s specific numbers, especially if the estate involves other assets, multiple heirs, or a home that’s been rented out at any point. But understanding the basic mechanics, especially the step up in basis rule, usually turns a scary unknown into a much more manageable planning conversation.

Frequently Asked Questions

Do I owe capital gains tax on a home I inherited in Colorado?
Possibly, but usually only on appreciation that happens after the date of death, thanks to the step up in basis rule. If the home sells close to its date of death value, taxable gain is often minimal.

Does Colorado have its own capital gains tax rate?
No. Colorado taxes capital gains as ordinary income at the state’s flat income tax rate. There’s no separate, higher rate for capital gains at the state level.

What’s the difference between inheriting a home and being gifted one while a parent is alive?
Inherited property generally gets a stepped up basis to fair market value at death. A home gifted during a parent’s lifetime typically keeps the parent’s original, lower cost basis, which can mean a larger taxable gain later.

Do multiple siblings who inherit a home together split the tax differently?
Each heir generally reports their share of any gain based on their ownership percentage, using the same stepped up basis rules. This is a good example of where working with a CPA on the specifics of the estate matters.

The Bottom Line for Colorado Families

If you’re staring down a big number in your head based on what your parents paid for their home forty years ago, take a breath. That’s very likely not the number the IRS will use. The step up in basis rule exists for exactly this situation, and it usually makes the tax picture far less painful than families expect.

This isn’t tax or legal advice, and every family’s financial situation is different, so it’s worth a conversation with a CPA or tax professional familiar with Colorado estates before you file anything or make decisions based on assumed numbers.

We help Denver-area families navigate exactly this kind of transition, from getting a solid date of death valuation to managing the actual sale. If you’re trying to figure out what selling a parent’s home looks like for your family, visit our senior transitions page or reach out and we can walk through it together.