Are you an Out-of-State Seller? If so, chances are this may affect you! With some exceptions, all sales of Colorado Real Property over $100,000 by non-residents are subject to a 2.0% withholding tax. Typically title companies withhold this tax at the time of closing and it is treated as an estimated payment to the State of Colorado. The seller; however, can claim credit for this estimated payment against the income tax liability when filing a Colorado income tax return for the year the property was sold
WHEN DOES A SELLER NOT HAVE TO PAY THE 2% WITHHOLDING TAX?
• The selling price is less than $100,000.
• The seller has a Colorado address or principle residence.
• The seller is a government agency.
• The seller is a Colorado corporation.
• The buyer of the property is a bank and the property is acquired by foreclosure.
WHEN DOES A SELLER HAVE TO COMPLETE THE FORM BUT NOT PAY? The title company, in good faith, relies upon a written affirmation signed by the seller, certifying under penalty of perjury they are exempt from withholding if one of the below apply. By signing the affirmation, the seller assumes responsibility for complying with state income tax laws:
• The 1099-S shows a non-Colorado address but the seller signs the affirmation proving Colorado residency at the time of the sale, or
• The seller, signs the affirmation of permanent place of business within Colorado, or
• The seller, who is an individual, signs the affirmation that the property was his/her principal residence, or
• The seller signs an affirmation that no Colorado income tax will be due on the sale, or
• There would’ve been withholding, but there were no net proceeds due to the seller, or
• The seller is a partnership, required to file an annual return of income for federal income tax purposes.
WHEN DOES A SELLER HAVE TO PAY THE 2% WITHHOLDING TAX?
• Any Corporation that does not maintain a permanent place of business in Colorado.
• Any non-resident seller.
• Any property that is in excess of $100,000 in value.
Normally, where a gain will be recognized for federal income tax purposes, Colorado tax will be due on any transaction. Gain is typically recognized any time where the sales price of the property exceeds the total of the taxpayer’s adjusted basis in the property plus expenses incurred in the sale. Withholdings are made by the title company or closing agent. The amount withheld shall be the lesser of 2.0% of the sales price OR the net proceeds that would otherwise be disbursed to the seller upon closing.
This regulation dates back to January 1993 in anticipation that Colorado income tax may be due on a gain from a sale. Over the past decade, many states have implemented withholding procedures to collect taxes before a sale from property sellers in order to ensure proper payment of state income tax. These withholding programs initially started in order to confirm that out-of-state property sellers met their tax burden in the state where the property was located. Most states feared that nonresident sellers would merely sell their properties without filing tax returns which could’ve resulted in lost revenue for that state.
Although this regulation has been utilized for many years, it is often overlooked as a consideration when listing and selling a property and can negatively impact the net proceeds at the time of closing for sellers.
This information provided reliable and based upon C.R.S. 39-22-604.5. This does not constitute legal, financial or other professional guidance for consumers regarding tax implications. Sellers are advised to seek legal and/or financial advice on their transaction.