Out of State Seller? Colorado Requires 2% Tax Withholding at Closing
The last thing you hope to encounter when get to the closing table on your real estate transaction is an unexpected cost. We're here to keep you informed and prepared as you consider buying or selling a property - our decades of experience in the local Grand County market allow us to streamline your process and minimize the unexpected as we prepare you for closing day.
One common surprise that can come for sellers is Colorado's 2% withholding tax on "nonresident" real estate transactions. Those not in the real estate world might never have heard of it, which just another reason having a realtor in your corner is key!
At closing, out-of-state sellers will pay the title company the withholding tax, and that amount will be credited against the seller's income tax liability when they file a Colorado income tax return for the year of the sale. So, it isn't actually that out-of-state sellers have to pay more than in-state sellers: they just have to pay it on the front end rather than when they file taxes. And, depending on your tax situation, you may get a portion of that withholding back. But 2% can be a big surprise if you aren't aware it will be deducted from the proceeds of your sale at closing!
WHEN DOES WITHHOLDING APPLY?
The Colorado Department of Revenue requires withholding from sale proceeds anytime the seller is a nonresident and the sale price is greater than $100,000. The law doesn’t just apply to out-of-state individuals; it also applies to corporations that do not maintain a permanent place of business in Colorado, as well as estates and trusts outside of Colorado.
HOW MUCH IS WITHHELD?
The withholding tax is the lesser of two options:
- 2% of the sales price
- net proceeds from the sale (read: the net amount that would otherwise be due to the seller on the settlement sheet)
For example:
With a sales price of $400,000 that nets the seller $65,000 prior to the nonresident withhold, the withholding would be $8,000 (2% of the sales price). If the $400,000 sales price only nets the seller $5,000, the withholding would be $5,000.
ARE THERE EXCEPTIONS TO THE WITHHOLDING?
When is an out-of-state seller not subject to the 2% withholding at closing? There are a few instances in which a nonresident seller does not need to file the form to withhold the tax ( Information with Respect to a Conveyance of a Colorado Real Property Interest - form DR 1083):
- The selling price is less than $100,000
- The seller has a Colorado address.
- The seller is a corporation that is incorporated under Colorado law or is currently registered with the Secretary of State.
- The seller is a government agency.
- The buyer of the property is a bank and the property was acquired by foreclosure.
In other situations, the DR 1083 form needs to be filled out and filed but 2% withholding tax is not paid at closing:
- The seller signs the affirmation of permanent place of business within Colorado.
- An individual seller signs the affirmation that the property was his/her principal residence immediately prior to the sale.
- The seller signs an affirmation that no Colorado income tax will be due on the sale.
- There were no net proceeds due to the seller in the transaction.
- The seller is a partnership, required to file an annual return of income for federal income tax purposes.
- The individual, estate or trust affirms Colorado residency at the time of the sale (even if the 1099-S shows an out-of-state address).
CONSIDERING SELLING YOUR GRAND COUNTY PROPERTY?
You made a solid investment in your Grand County property, and whether you’ve owned it for months, years, or even decades, our goal is to help you sell quickly and for the highest possible profit. And our knowledge of the ins-and-outs of our local market and the municipal, county, and state regulations (including things like the 2% withholding tax!) helps make the process seamless and transparent. We'd love for you to trust us to tell the story of your home - reach out to learn more about the selling process and get your complimentary property valuation!
Posted by Angela McDonough (Sandstrom) on
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