If you own real property in Colorado but your primary home is located outside the state, you should know about a possible 2% withholding tax when you sell. This comes up often for our out-of-state clients selling a vacation home or investment property in Silverthorne, Dillon, Keystone, or elsewhere in Summit County. Our colleagues at Land Title Guarantee Company have provided the following information to help sellers understand the costs associated with selling a Colorado property.
In general, sales of Colorado real property valued at more than $100,000 and made by non-residents of Colorado are subject to a withholding tax in anticipation of any Colorado income tax that could be due on the gain of the sale. This withholding is a prepayment, not an extra tax, and it's credited against whatever Colorado income tax you actually owe when you file, currently a flat 4.4% rate for individuals.
Any sale that shows a non-Colorado address for the transferor may be subject to this withholding.
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.
However, there are exceptions to this 2% withholding. Withholding shall not be made when:
- The selling price of the property is not more than $100,000;
- The transferor is an individual, estate, trust, or partner and both the Form 1099-S and the authorization for disbursement of funds show a Colorado address for the transferor;
- The transferee is a bank or corporate beneficiary under a mortgage or beneficiary under a deed of trust and the Colorado real property is acquired in judicial or nonjudicial foreclosure or by deed in lieu of foreclosure; or
- The transferor is a corporation incorporated under Colorado law or currently registered with the Secretary of State's office as authorized to transact business in Colorado;
- The title insurance company or the person providing the closing and settlement services, in good faith, relies upon a written affirmation executed by the transferor, certifying under penalty of perjury one of the following:
- that the transferor, if an individual, estate, trust or partner, is a resident of Colorado;
- that the transferor, if a corporation, has a permanent place of business in Colorado;
- that the Colorado real property being conveyed is the transferor's principal residence, which could qualify for the exclusion of gain under Section 121 of the Internal Revenue Code;
- that the transferor, if a partnership, files an annual federal partnership return of income under section 6031(a) of the Internal Revenue Code;
- that the transferor will not owe Colorado income tax reasonably estimated to be due from the inclusion of the actual gain required to be recognized on the transaction in the gross income of the transferor;
- that there are no net proceeds, in which case there is no corresponding paragraph to sign, and the seller's settlement statement is sent showing no proceeds to the seller.
If the out-of-state seller can agree to an affirmation, they should sign the corresponding paragraph on page 2 of the form.
If this is a short sale or the seller is not receiving any proceeds, a settlement statement will be attached to the DR 1083 to show "No Net Proceeds."
By law, all completed forms are to be sent to the Colorado Department of Revenue within 30 days of the closing date.
If you know you are an out-of-state seller, it is important to discuss this with both your Realtor and the closer working with the title company handling the closing. You should also consult your accountant if you have questions about the collection of the 2% withholding.
Frequently Asked Questions
Is the Colorado 2% withholding an extra tax on top of what I already owe?
No. It's a prepayment toward the Colorado income tax you may owe on the gain from the sale. It's credited against your actual tax liability when you file your Colorado return, so if you overpay through withholding, you can get the difference back as a refund.
Does this apply if I'm selling my primary Colorado residence?
No. If the property being sold is your principal residence and qualifies for the gain exclusion under Section 121 of the Internal Revenue Code, you can sign an affirmation with your title company and avoid the withholding.
What form is used to report this withholding?
The title company or closing agent files Form DR 1083 with the Colorado Department of Revenue within 30 days of closing.
Does this apply to vacation homes and investment properties in Summit County?
Yes. This is one of the most common ways the 2% withholding comes up for our clients, since many Silverthorne, Dillon, and Keystone property owners live out of state and use their Colorado property as a second home or rental.
Below is Page 2 of the form this article discusses:
Selling a Summit County property from out of state?
If you're an out-of-state owner planning to sell in Silverthorne, Dillon, Keystone, or anywhere else in Summit County, contact Nelson Mountain Real Estate to walk through what this withholding means for your specific sale, alongside the rest of the closing process.