How to Document the Step-Up in Basis for Inherited Colorado Property

If a parent bought a house in Denver for $120,000 in 1992 and it's worth $850,000 at the time of their death in 2026, their estate owes zero capital gains tax on that $730,000 appreciation — and if you sell it promptly, neither do the beneficiaries. This is the step-up in basis rule, and it is one of the most valuable tax protections available to Colorado families settling an estate. But it only works if you document it correctly. This post explains exactly what documentation you need, when to get it, and where the rule has critical exceptions.

What the Step-Up in Basis Actually Does

When you inherit property, its tax basis for capital gains purposes is not the original purchase price — it's the fair market value at the date of the decedent's death. This is called the "stepped-up basis."

The practical effect: if the family home was worth $850,000 on the date of death and you sell it six months later for $870,000, the taxable gain is $20,000 (the increase after death), not the full $750,000 appreciation since the original purchase. For most Colorado families inheriting real estate along the Front Range, in Summit County, or in any other high-appreciation area, this translates to tens or hundreds of thousands of dollars in capital gains tax that simply does not exist — if you document the basis correctly.

The same rule applies to brokerage accounts. A portfolio worth $400,000 at the date of death receives a stepped-up basis at $400,000, erasing any unrealized gains accumulated over decades.

Colorado Is a Separate Property State: The 50% Rule

Colorado is a separate property state, not a community property state. This matters significantly for jointly owned assets.

When spouses own property jointly as tenants in common or as joint tenants with rights of survivorship, only the deceased spouse's half receives the step-up. The surviving spouse's half retains its original basis.

Example: Spouses bought a Boulder home together for $200,000 in 2000 (each has a $100,000 basis). At death in 2026, the home is worth $900,000. The deceased spouse's half — worth $450,000 — receives a step-up from $100,000 to $450,000. The surviving spouse's half retains the original $100,000 basis. If the surviving spouse sells the home immediately, the gain is calculated only on their half: $450,000 (sale proceeds) minus $100,000 (original basis) = $350,000 taxable gain, not zero.

This is not the outcome most Colorado families expect.

The UDCPRDA Exception: The Double Step-Up for Imported Community Property

Colorado has adopted the Uniform Disposition of Community Property Rights at Death Act (UDCPRDA). This statute provides a potentially enormous tax benefit for married couples who previously lived in a community property state — California, Texas, Arizona, Nevada, Washington, Idaho, New Mexico, Louisiana, or Wisconsin — and subsequently moved to Colorado.

If the couple brought community property assets with them (assets acquired while living in the community property state, with both spouses' labor and earnings), and those assets maintained their community property character in Colorado, then upon the death of either spouse, both halves of those assets receive a step-up to fair market value. This is the "double step-up."

Example: A couple moved from California to Colorado in 2015, bringing a brokerage account worth $300,000 (community property). By 2026 at the time of the first spouse's death, the account is worth $900,000. With the double step-up, both halves receive a step-up — the entire $900,000 becomes the new basis. Selling immediately produces zero capital gains.

The danger: The double step-up is destroyed if the couple:

• Commingled the California community property with Colorado separate property (mixing funds in the same account)
• Retitled community real estate into a standard Colorado joint tenancy with right of survivorship
• Signed documents that treated the property as Colorado separate property

If any of these occurred, the community property characterization is gone, and the double step-up with it. CPAs and estate attorneys who specialize in UDCPRDA frequently use Joint Community Property Trusts or strictly segregated accounting to preserve this status.

The Documentation You Need (And When to Get It)

For Real Estate

Order a date-of-death appraisal immediately. This is the single most important step and the one most executors delay too long. You need a licensed residential appraiser to value the property as of the date of death — not today's value, not what Zillow says, but a formal appraisal with an effective date of the date of death.

• Who does it: A licensed Colorado residential appraiser (not a real estate agent, not Zillow, not the county assessor's assessed value)
• Cost: $300–$600 for a standard residential appraisal; higher for complex properties or mountain-area homes
• Timing: Get this done within the first 60 days. Appraisers can do retroactive valuations, but the further from the date of death, the more estimation is involved
• What to do with it: Keep the original appraisal report permanently in the estate file. Provide a copy to beneficiaries when they receive the property or proceeds. The IRS can ask for this documentation years later when a beneficiary eventually sells

Collect the county assessor's records. The county assessor's assessed value is not the basis — it's a different calculation. But the assessor's records are supporting documentation showing the property's history. Also collect the original purchase documents (deed, closing disclosure) to document what the original cost basis was, which supports the narrative of how much appreciation occurred.

File the TD-1000. This is separate from basis documentation, but critical. When distributing real estate via a Personal Representative's Deed, the TD-1000 Real Property Transfer Declaration must accompany the recorded deed. The TD-1000 tells the county assessor the basis for the transfer — and critically, Section 5 allows you to deduct the value of any personal property (furniture, appliances) included in the transfer, preventing the assessor from inflating the real estate's assessed value. Failing to file the TD-1000 results in a $25 penalty or 0.025% of the sale price.

For Brokerage Accounts and Investment Portfolios

Request date-of-death valuations from the brokerage in writing. Most major brokerage firms (Schwab, Fidelity, Vanguard, Merrill) have an estate department that handles this. Send a written request with the death certificate and the estate's EIN. Ask specifically for the "fair market value as of [date of death]" for each security.

What the brokerage provides: A statement showing the closing price of each security on the date of death (or the average of high and low prices if markets were closed). For mutual funds, this is the NAV on that date. This document becomes the stepped-up basis for each position.

Store permanently. Keep the brokerage's written confirmation of date-of-death values in the estate file. When beneficiaries eventually sell these securities — whether in six months or 15 years — they'll need this documentation to prove their basis.

For Other Assets

• Vehicles: The Kelley Blue Book value as of the date of death is a reasonable basis for valuation, supported by the NADA guide. For valuable collector vehicles, a professional appraisal is worth the cost.
• Personal property: Household goods, jewelry, art, and collectibles require a professional appraiser for anything with significant value. A general estate sale appraiser can handle household goods in bulk.
• Business interests: A business valuation professional (typically a CPA or business valuator with appropriate credentials) is required for any significant business interest. This is not a DIY documentation task.
• Life insurance proceeds: Life insurance paid to a named beneficiary is not a probate asset and has no step-up in basis issue — the beneficiary receives the proceeds tax-free as insurance proceeds, not as an inherited asset.

How This Flows into the Tax Returns

The step-up in basis documentation feeds into two tax-related areas:

The estate's fiduciary income tax return (DR 0105 / Form 1041): If the estate sells an asset during probate — such as selling the family home to distribute the proceeds among beneficiaries — the gain or loss is calculated using the stepped-up basis. If you sell a house worth $850,000 at the date of death for $870,000 six months later, the estate's capital gain is $20,000. This goes on Form 1041 and Colorado DR 0105.

Beneficiary reporting when they eventually sell: When beneficiaries receive assets from the estate rather than cash proceeds, they receive those assets at the stepped-up basis. When they later sell — even 10 years later — their gain is calculated from the stepped-up basis date. The documentation you create now protects them from tax claims years in the future.

The Failure Mode That Costs Families the Most Money

The most expensive step-up in basis mistake is a documentation failure, not a legal mistake. Families who receive inherited Colorado real estate and sell it years later without the original appraisal — because nobody thought to order one at the time of death — are left trying to reconstruct the date-of-death value retroactively. Retroactive appraisals are possible but expensive, less precise, and sometimes rejected by the IRS.

If you're within the first 90 days of a Colorado estate, order the real estate appraisal now. If you're past that window and haven't done it yet, get a retroactive appraisal immediately before more time passes.

Frequently Asked Questions

Does the stepped-up basis apply to real estate held in a revocable living trust?

Yes. Assets held in a revocable living trust receive a step-up in basis at the grantor's death, just as if the assets had passed through probate. The trust must have been revocable during the grantor's lifetime — irrevocable trusts funded during life are treated differently and may not receive the full step-up. Confirm the trust type with the estate attorney or CPA if you're unsure.

Do I need to report the stepped-up basis anywhere on the estate tax return?

For most Colorado estates in 2026, no federal estate tax return (Form 706) is required — the federal exemption is $15 million per individual. You don't file Form 706 solely to document basis; basis documentation stays in your files. If the estate does file Form 706, the asset values reported there become the basis. The IRS has a basis consistency requirement: the basis reported on the beneficiary's eventual sale must be consistent with the value reported on Form 706 if one was filed.

What if the deceased owned Colorado property with an unmarried partner?

The step-up only applies to the deceased's ownership share. If an unmarried couple owned property as tenants in common (50/50), the deceased's 50% receives a step-up and the surviving partner's 50% does not. The surviving partner retains their original cost basis on their half. This is similar to the joint tenancy situation for married couples in Colorado, except that the UDCPRDA community property double step-up is not available to unmarried partners.

Can I use the county assessor's value as the stepped-up basis?

No. The county assessor's value is an assessed value for property tax purposes, calculated using mass appraisal methods that often differ significantly from fair market value. The IRS requires fair market value at the date of death, which means an appraisal by a licensed professional reflecting what the property would sell for between a willing buyer and willing seller. The assessor's value is supporting context, not the basis itself.

How long do I need to keep the step-up in basis documentation?

Permanently, or until the beneficiary sells the asset and their applicable statute of limitations for that tax year expires — typically three years from the later of the filing date or the return due date. Since you can't know when a beneficiary will sell an inherited property (it could be 30 years from now), the safest practice is permanent retention. Store the appraisal and brokerage date-of-death statements in a secure location and give copies to beneficiaries when they receive the assets. The Colorado Final Tax & Estate Tax Guide includes a documentation checklist specifically for this purpose.

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