Understanding The 2% Colorado Real Estate Tax for Second Homeowners
Understanding The 2% Colorado Real Estate Tax – If you have a gain on the sale of real estate in Colorado – you will likely be subject to paying a 2% Tax on the net gain.
If you are you a second homeowner in Colorado, and you are an out-of-state owner – you are subject to a 2% Tax on the sale of your Colorado real estate.
Colorado 2% Withholding (DR 1083). This law affects non-Colorado residents or those parties moving out-of-state and not purchasing another primary residence. The amount, if withheld, shall be the lesser of 2% of the sales price of the property or the net proceeds.
Per Colorado Form DR 1083: “Normally Colorado tax will be due on any transaction upon which gain will be recognized for federal income tax purposes. Gain will normally be recognized for federal income tax purposes any time the selling price of the property exceeds the total of the taxpayer’s adjusted basis in the property, plus the expenses incurred in the sale of the property. The taxpayer’s adjusted basis of the property will normally be the taxpayer’s total investment in the property, minus any depreciation thereon he has previously claimed for federal income tax purposes.”
The 2% withholding on the proceeds of a sale by a nonresident of Colorado is not a tax on nonresidents that is not paid by residents, which would clearly be a violation of the interstate commerce clause of the Constitution. It is a withholding to insure nonresidents pay the Colorado income tax on the proceeds of the sale on Colorado property. Without that withholding, a nonresident could avoid the tax by never filing a Colorado return.
In general. With certain exceptions, sales of Colorado real property valued of $100,000 of more, and are made by nonresidents of Colorado, are subject to a withholding tax in anticipation of the Colorado income tax that will be due on the gain from the sale.
“The 2% withholding on the proceeds of a sale by a nonresident of Colorado is not a tax on nonresidents that is not paid by residents”
The tax is ONLY due on the NET PROCEEDS from the sale. It is the standard practice of some Title Companies to deduct 2% of the PURCHASE PRICE of the real estate transaction for out-of-state owners. You should check your Seller Settlement Statement, and consult with your CPA.
“A transferor who is an individual, estate, or trust will be subject to the withholding tax if either the federal Form 1099-S to be filed with the Internal Revenue Service to report the transaction or the authorization for the disbursement of the funds resulting from the transaction shows a non-Colorado address for the transferor.
A corporate transferor will be subject to the withholding tax if immediately after the transfer of the title to the Colorado real property interest, it has no permanent place of business in Colorado. A corporation will be deemed to have a permanent place of business in Colorado if it is a Colorado domestic corporation, if it is qualified by law to transact business in Colorado, or if it maintains and staffs a permanent office in Colorado.”
The 2% Tax ONLY on the NET PROCEEDS
“The out of state seller is required to pay 2% only on the gain of the sale of the property. The Title Company will automatically deduct 2% of the Gross Purchase Price on the Seller Settlement Statement. This assumes the Sales price is 100% “gain” or profit.” The seller will need to file with the State of Colorado to provide the proof of the gain – that amount only will be taxed at the 2% rate.
Colorado is also a disclosure state – and so the sales info is recorded and visible on the County Assessor’s site. If a Seller purchased a home 5 years ago for $1,000,000 and now selling for $2,500,000 – it seems reasonable to expect the title company to deduct the $1,000,000 from the taxable gain? But the title company does not do bookkeeping. If the seller spent $1,000,000 on a remodel there is no way for the title company to verify this info.
If a seller bought land and built a home there is no way for the title company to know what the effective basis is. And yes the seller may also add closing costs to their basis to deduct from the gain… etc.
Per Instructions on the back of form DR1083 Information with Respect to a Conveyance of a Colorado Real Property Interest
“Normally Colorado tax will be due on any transaction upon which gain will be recognized for federal income tax purposes. Gain will normally be recognized for federal income tax purposes any time the selling price of the property exceeds the total of the taxpayer`s adjusted basis in the property, plus the expenses incurred in the sale of the property. The taxpayer`s adjusted basis of the property will normally be the taxpayer`s total investment in the property, minus any depreciation thereon he has previously claimed for federal income tax purposes.”
DR 1083 (10/17/13), COLORADO DEPARTMENT OF REVENUE, Denver, CO 80261-0005
The Title Company’s Legal Department:
“The withholding tax is made in anticipation of the Colorado income tax that will be due on the gain from the sale (quoting from the instructions on the form). It is essentially a prepayment of the tax and the seller/taxpayer must then submit a tax return to claim any refund. The procedure is very similar to the FIRPTA withholding tax which is also a prepayment on any federal income tax which may be due.”
I am not a CPA nor an Attorney – But Do the Math…
I am not a CPA nor an Attorney, and I suggest you send this to your CPA for their professional advice. Do the math – the Sales Price will never be 100% Gain or Net Proceeds on the Sale of a property in Colorado – you pay the 2% only on the Capital Gain.
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email: Chris.Kopf@CBMP.com
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Coldwell Banker Mountain Properties
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