Capital gains taxes play a key role in real estate investment and financial planning. These taxes vary by state, so it’s important for residents and investors to understand them. Here’s a breakdown of Colorado’s capital gains taxes, covering rates, exemptions, and ways to reduce your tax liability.
What Are Capital Gains?
Capital gains are profits earned from the sale of an asset. These include stocks, real estate, and other investments. If you sell an asset for more than you paid, the profit is called a capital gain. Conversely, if you sell for less than the purchase price, this is called a capital loss.
Types of Capital Gains
Short-Term Capital Gains: This applies to assets held for one year or less. They are taxed as ordinary income, meaning they are subject to regular income tax rates.
Long-Term Capital Gains: An asset is considered long-term if held for more than one year. They are usually taxed at a lower rate, making long-term investment potentially more profitable.
Capital Gains Tax Rates in Colorado
State rates vary from 0% (capital gains taxes not required) to a high of 13.3% in California. As of 2023, Colorado taxes capital gains at a flat income tax rate of 4.4%. There are some limited exemptions for certain long-term capital gains on assets acquired before 1999.
It’s important to anticipate federal capital gains taxes which can be much higher. Federal rates for long-term gains range from 0% to 20%, depending on your income bracket.
Capital Gains Tax Exemptions and Deductions
Colorado, as well as other states, offer several exemptions and deductions that can reduce capital gains tax owed:
Primary Residence Exemption
If you sell your primary residence, you may exclude up to $250,000 if you are single, or $500,000 if you’re married, from taxation - provided you meet certain criteria, like living in the home for at least two of the last five years.
1031 Exchange
Reinvesting the proceeds from the sale of one property into another similar property (residential to residential, commercial to commercial, etc.), allows you to defer paying capital gains taxes through a 1031 exchange. This deferral postpones the tax payment rather than eliminating it all together, meaning you’ll still owe capital gains when you eventually sell the new investment property.
Colorado Capital Gains Deduction
Colorado allows a capital gains deduction for investments held for more than five years, which increases the potential profitability.
Understanding capital gains taxes in Colorado is crucial for planning your investment strategies. Since rules and regulations can change annually, we always recommend consulting with a tax professional or financial advisor. As RealtorsⓇ, we provide this information to help our clients stay informed and proactive with their real estate portfolio. Please reach out to us if we can assist you in building wealth through real estate.
