Are you an out-of-state seller? With some exceptions, all sales of Colorado Real Property over $100,000.00 by non-residents are subject to a 2% withholding tax. This regulation dates back to January 1993 in anticipation that Colorado income tax may be due on a gain from the sale. Although this has been around for many years, it is often overlooked as a consideration when listing and selling a property and can impact the net proceeds at the time of closing.
Individuals, estates, or trusts are subject to withholding if either federal form 1099-S must be filed with the IRS reporting the sale OR if sale proceeds are disbursed to a seller with an out-of-state address. Corporate transfers will be subject to the withholding if there is no permanent place of business for the entity in Colorado, and that is confirmed if they are a Colorado domestic corporation; they are qualified by law to transact business in Colorado; or if they maintain a permanent office in the state.
Withholdings are made by the title company or closing agent. Attorneys, banks, savings & loans, corporations, partnerships, or other entities providing closing and settlement services also shall withhold the tax if applicable to the transaction. The amount withheld shall be the lesser of 2% of the sales price OR the net proceeds that would otherwise be disbursed to the seller upon closing.
You may be exempt to withholding if any of the following apply:
- Sales price is $100,000.00 or less.
- Transferor (seller) has a Colorado address upon closing and for 1099S purposes.
- Transferee is a bank or corporate beneficiary under a mortgage/deed of trust, and the property is acquired through foreclosure or by Deed-in-Lieuof foreclosure.
- Transferor is a Colorado corporation or is currently registered with the Secretary of State to transact business in Colorado.
- Transferee is a partnership as defined by the IRS, and required to file an annual federal return.
- The title company, closing agent or other settlement service provider, in good faith, relies upon a written affirmation executed by the transferor (seller), certifying under penalty of perjury they are exempt from withholding if one of the following apply:
- Colorado residency;
- Permanent place of business in Colorado for the corporation;
- The real property being conveyed is their principal residence; or
- The transferor will not owe Colorado income tax estimated to be due from inclusion of the actual gain recognized on the sale in gross income of the transferor.
Normally, Colorado tax will be due on any transaction where gain will be recognized for federal income tax purposes. Gain is typically recognized any time the sales price of the property exceeds the total of the taxpayer’s adjusted basis in the property plus expenses incurred in the sale.
The closing agent will have a Form DR 1083 completed with closing. This form must be submitted to the Colorado Department of Revenue if tax is withheld OR if Colorado tax would have been withheld except for the signing of a written affirmation as noted above. When taxes are withheld, the funds must be submitted along with Form DR 1083 and Form DR 1079 to the Department of Revenue within 30 days of the closing date. The transferor will also receive a copy of these forms to submit with their Colorado tax return.
The information provided here is deemed 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 by Guardian Title to seek legal and/or financial advice on their transaction.