When you sell a house, condo, or other real estate in Colorado for more than you paid for it, you may owe capital gains tax on the profit, also called capital gain. Here’s a comprehensive guide to how this tax works in Colorado, current rates, deductions you can take, and more.
What is the Capital Gains Tax Rate in Colorado?
Colorado follows the federal capital gains tax rates, which vary depending on your total taxable income and filing status:
- 0% for incomes up to $41,675 for single filers or $83,350 for married filing jointly
- 15% for incomes between $41,676 and $459,750 for single or $83,351 to $517,200 married filing jointly
- 20% for higher incomes above those thresholds
So if you’re in a lower or middle income tax bracket, your long-term capital gains tax rate could be 0% or 15%. The maximum 20% rate applies to higher earners.
Read More: Colorado Sales Tax Calculator and Detailed Guide on Administration
Read More: Capital Gains Tax on Home Sales in the USA
Do I Owe Tax on the Sale of My Primary Residence?
In many cases, you can exclude capital gains up to $250,000 if you’re single or $500,000 if married filing jointly on the sale of a primary residence you’ve lived in for 2 out of the past 5 years. This helps many homeowners avoid owing capital gains tax.
However, you may still owe capital gains tax if:
- You don’t meet the 2 out of 5 years ownership and use tests
- Your gain exceeds the $250k or $500k exclusion amounts
- You have taken the primary residence exclusion on another home sale in the past 2 years
Read More: Capital Gains on Sale of Primary Residence in California
Do I Owe Tax When Selling an Investment Property or Second Home?
When selling rental properties, vacation homes, land, or other real estate investments in Colorado, capital gains tax almost always applies. Unlike a primary residence, you do not get any capital gains exclusion for investment properties or secondary residences.
Your taxable gain is calculated as the sale price minus your adjusted cost basis, which factors in the original purchase price plus improvements and other basis adjustments. The applicable capital gains tax rate then applies based on your total taxable income and filing status.
Read More: Capital Gains Tax on Real Estate: A Detailed Guide
How Can I Reduce My Tax Burden on an Investment Property Sale?
While the capital gains tax exclusion doesn’t apply on investment real estate, there are some other deductions you can take to reduce your taxable profit:
- Cost basis adjustments – Improvements and other costs you incurred can reduce your taxable gain.
- Depreciation recapture – If you have claimed depreciation deductions on the property previously, the recaptured amount is taxed at a maximum 25% rate.
- 1031 exchange – You may qualify for a 1031 exchange allowing you to defer capital gains by reinvesting in another investment property. You need to follow specific IRS rules.
Consulting a Colorado tax professional can help minimize your capital gains liability when selling any significant investment real estate holdings.
Read More: How Long is a Colorado Sales Tax Exemption Certificate Good For?
Estimating Capital Gains Tax in Colorado
When selling real estate in Colorado, follow these steps to estimate the capital gains tax you may owe:
- Calculate your capital gain
- Sale price minus purchase price and cost basis adjustments
- Deduct capital gains exclusions if applicable
- Apply the appropriate capital gains tax rate
- 0%, 15% or 20% depending on income
- Factor in deductions to reduce taxable gain
- Consult a tax professional for complicated tax situations
Below is a table outlining examples of estimated capital gains tax liability in different scenarios:
| Sale Details | Gain | Tax Rate | Estimated Tax |
|---|---|---|---|
| Sell primary residence for $800,000, purchased for $600,000 | $200,000 | 0% | $0 |
| Sell rental condo for $400,000, purchased for $200,000 | $200,000 | 15% | $30,000 |
| Sell vacant land for $1.2M, purchased for $800k | $400,000 | 20% | $80,000 |
As you can see, primary residences often qualify for the full capital gains exclusion, while investment real estate sales typically owe capital gains taxes.
Conclusion
As you can see, selling real estate in Colorado for a profit over your original purchase cost can trigger capital gains taxes, but primary residences often qualify for exclusions that minimize or eliminate taxes for homeowners. On the other hand, capital gains on investment properties, second homes and land get no special exceptions – those profits are typically taxed.
Work with a trusted Colorado tax professional or CPA prior to any significant real estate transactions to understand what capital gains taxes you may owe. Proper planning is key to making tax-savvy investment decisions and avoiding any costly surprises at tax time.
Frequently Asked Questions
Still have questions on how capital gains tax works in Colorado? Here are answers to some commonly asked questions:
How is capital gain calculated on a home sale?
Your capital gain is the difference between the sale price and your adjusted cost basis. The cost basis starts with the original purchase price but is adjusted for improvements, closing costs, depreciation deductions (if an investment property) and any other increases or decreases to basis.
What home improvements add to cost basis?
The cost of most home improvements can be added to your cost basis, potentially lowering your taxable capital gain, including:
- Room additions like a bedroom or bathroom
- Kitchen or bath remodels
- New roof, flooring, windows, siding
- Swimming pools
- Landscaping like trees, patios, retaining walls
Keep documentation like receipts and contractor invoices to prove your capital investments.
How long do I need to live in a home to get the capital gains tax exclusion?
To qualify for the primary residence capital gains exclusion of up to $250,000 (single) or $500,000 (married joint) when selling, you must have owned and lived in the home as your main residence for at least 2 out of the previous 5 years.
Are capital gains on rental property sale taxed at a higher rate?
No, capital gains tax rates on investment properties are the same as those that apply to other assets like stocks. But while primary residences get a generous exclusion, most gains on rental properties, second homes, or land sales are taxed.
Can I avoid capital gains tax on a second home?
Unfortunately there is no capital gains exclusion for second homes and vacation properties. However, you may qualify for savings with the 1031 exchange, which allows you to defer capital gains by reinvesting in another like-kind property. This involves strict IRS rules and limits.
H2. SERP Questions on Capital Gains Tax in Colorado
Want to know more on specific aspects of capital gains tax when selling real estate in Colorado? Here are answers to some popular SERP search questions:
Does Colorado have capital gains tax on real estate?
Yes, Colorado taxes capital gains from real estate sales just like the federal government. If you sell property at a profit, you’ll owe capital gains taxes on the amount over your original purchase price, with some exceptions.
Is there capital gains tax on inherited property in Colorado?
Inherited properties in Colorado receive a step-up in cost basis to the fair market value as of the previous owner’s date of death. This minimizes taxes for inheritors. However, if the property further rises in value and is later sold, capital gains taxes will apply on appreciation during your ownership.
Does Colorado tax capital gains on rental property sales?
Capital gains earned on selling Colorado rental properties and other investment real estate are subject to federal capital gains tax rates of 0%, 15% or 20%, with no special home sale exclusion. Only primary residences that meet ownership and use rules qualify for the capital gains tax break.
Is there capital gains tax on selling land in Colorado?
Yes, profits from vacant land sales in Colorado are subject to federal capital gains tax rates, with no special exemptions. Land is not considered a primary residence, so the $250k or $500k home sale capital gains exclusion does not apply.
Does Colorado allow you to carry forward capital losses?
Similar to federal law, any capital losses you incur in excess of capital gains in a tax year can be used to offset future capital gains for an unlimited number of future tax years until the amount of net loss is exhausted. This applies to all capital assets, including stocks, real estate and other investments.
