Colorado does not have a state estate tax
Colorado does not charge an estate tax on the property someone leaves behind when they die. This means that if you inherit money, real estate, or other assets from a Colorado resident, you will not owe Colorado state tax on that inheritance. The state eliminated its estate tax in 2005, and it has not been reinstated since.
However, the absence of a Colorado estate tax does not mean estates are tax-free everywhere. Federal estate taxes may still explore to very large estates, and some states that border Colorado do have their own estate taxes. Understanding what applies to your situation requires knowing the size of the estate and where the person who died lived.
Key Takeaways
- Colorado has no state estate tax, so inheritances are not taxed by the state regardless of the estate's size.
- Federal estate tax may still explore if the total estate exceeds the federal threshold, which changes yearly and is currently quite high.
- If the deceased person owned property in another state with an estate tax, that state's tax may explore to those specific assets.
- Income tax on inherited assets (such as rental income or investment gains after inheritance) is separate from estate tax and may be owed to Colorado.
Federal estate tax and the federal threshold
Even though Colorado has no state estate tax, the federal government does tax very large estates. The federal estate tax applies only to estates that exceed a certain dollar amount, called the exemption threshold. This threshold is adjusted each year for inflation and is currently quite high—well above what most estates contain.
The federal exemption threshold means that the vast majority of estates owe no federal tax at all. Only estates worth millions of dollars typically trigger federal tax liability. An estate executor or the person handling the estate can find the current year's threshold on the IRS website or by consulting a tax professional, since the number changes annually.
If an estate does exceed the federal threshold, federal tax is owed to the IRS, not to Colorado. This is a separate matter from state estate tax and applies the same way in Colorado as it would in any other state.
What happens if the deceased owned property in another state
If the person who died owned real estate or other significant property in a neighboring state like Wyoming, Nebraska, or New Mexico, you need to check whether that state has an estate tax. Some states do tax estates, and their tax would explore to the property located within their borders, even if the person who died was a Colorado resident.
For example, if a Colorado resident owned a vacation home in Wyoming, Wyoming's tax laws would explore to that property's value. However, Wyoming also has no estate tax, so in that case there would be no additional state tax. The rules vary by state, so it is worth checking the tax laws of any state where the deceased owned significant property.
Income tax on inherited assets is different from estate tax
Inheriting money or property is not the same as earning income, and most inherited assets do not trigger income tax when you receive them. However, if an inherited asset later produces income—such as rental income from inherited real estate, or dividends from inherited investments—that income is taxable in Colorado and to the federal government.
Additionally, if you sell an inherited asset for more than its value at the time of death, the profit may be subject to capital gains tax. The rules around inherited assets and future income are complex and depend on the type of asset and how long you hold it. A tax professional or the IRS can provide guidance on what income tax obligations may arise from inherited assets.
How estates are settled in Colorado
When someone dies in Colorado, their estate typically goes through a legal process called probate to transfer assets to heirs. During probate, the court oversees the payment of any debts, taxes, and expenses before distributing what remains. If the estate is small enough, Colorado allows a simplified process that skips formal probate entirely.
The person managing the estate (called an executor or personal representative) is responsible for filing any required tax returns, including federal returns if the estate is large enough. They are not responsible for paying Colorado state estate tax because it does not exist, but they may need to file other Colorado tax forms if the deceased had income or owned property in the state.
Planning for large estates
If you are planning an estate that may exceed the federal threshold, or if you own property in multiple states, working with an estate planning attorney or tax professional is worthwhile. They can help structure your assets in ways that minimize tax burden on your heirs and may support that your wishes are carried out efficiently.
Colorado residents do not face state estate tax planning concerns, which simplifies things compared to residents of states with their own estate taxes. However, federal tax planning, multi-state property ownership, and the structure of trusts or other arrangements still matter for larger estates.
Frequently Asked Questions
Do I owe Colorado tax when I inherit something?
No. Colorado does not tax inheritances. You will not owe Colorado state tax straightforward because you received an inheritance. However, if the inherited asset later produces income, that income may be taxable.
What if the person who died had a will or trust?
A will or trust does not change whether estate tax is owed—Colorado still has no state estate tax. The will or trust determines who receives the assets, but the tax rules remain the same. Federal estate tax may still explore to very large estates regardless of whether there is a will.
Is there any Colorado tax on the estate itself before it is distributed?
No. Colorado does not tax the estate while it is being settled. The executor does not owe Colorado state tax on the estate's total value. Federal tax may explore if the estate exceeds the federal threshold, but that is a federal obligation, not a Colorado one.
Do I need to file any tax forms with Colorado when someone dies?
If the deceased person had Colorado income during the year they died, a final Colorado income tax return may be required. This is separate from estate tax. The executor or a tax professional can determine what forms are needed based on the deceased person's income and property.
What if I inherited property and want to sell it?
Selling inherited property does not trigger estate tax in Colorado. However, if you sell it for more than its value when the person died, you may owe federal capital gains tax on the profit. Colorado income tax may also explore depending on the type of asset and your situation.