One of the first questions sellers ask me is, “Will I owe taxes when I sell?” For most people selling the home they live in, the answer is no, or much less than they feared. But rentals, second homes, inherited houses and homes owned for a long time can be different. Here’s how capital gains tax works when you sell a house in Colorado.
Note: I’m a real estate broker, not a CPA, financial advisor or lawyer. Tax rules change and every situation is different, so confirm your numbers with a tax professional before you sell.
What counts as a capital gain on a home sale
Your gain is roughly your sale price, minus your selling costs, minus your adjusted basis. Your basis usually starts with what you paid for the home, plus certain purchase costs, plus the cost of capital improvements such as a new roof, an addition or a remodeled kitchen. Routine repairs and maintenance don’t count.
Selling costs, including real estate commissions, title fees and some closing costs, reduce your gain. Our guide to the cost of selling a house in Colorado breaks those down.
The home sale exclusion: $250,000 or $500,000
Under federal law, if you sell your main home you can usually exclude up to $250,000 of gain, or up to $500,000 if you’re married and file a joint return. To qualify, during the 5 years before the sale:
- Ownership test: you (or your spouse) owned the home for at least 2 years.
- Use test: you lived in it as your main residence for at least 2 years. For the full $500,000, both spouses must meet the use test. The 2 years don’t have to be continuous.
- Frequency: generally, you haven’t used the exclusion on another home sale in the past 2 years.
There are exceptions, including partial exclusions for some moves due to work, health or other unforeseen circumstances, and special rules for military and Foreign Service members. IRS Publication 523 has the details.
Who is most likely to owe tax
- Long-time Denver owners. If you bought decades ago in Washington Park, Cherry Creek or Highlands, your gain may exceed $250,000 or $500,000, even after improvements.
- Rental and investment property. The exclusion doesn’t apply to a home that was never your residence, and depreciation you took (or could have taken) is generally taxed when you sell. If you’re weighing this, see sell or rent your Denver house.
- Second homes and cabins. A mountain home you use part-time usually isn’t your main home, so the exclusion generally won’t apply.
- Divorcing couples. Timing and who keeps the house affect who can use the exclusion. Read selling a house during divorce in Colorado.
Inherited homes: the stepped-up basis
If you inherit a house, your basis is generally the home’s fair market value on the date of death, not what your parent paid. That’s called a stepped-up basis, and it often means heirs who sell soon after inheriting owe little or no capital gains tax. This is why a date-of-death home valuation matters so much. For the full breakdown, with an example and special cases like joint tenancy and trusts, read capital gains tax on an inherited house in Colorado. If you’re deciding what to do with the property, start with your 4 options for an inherited house.
What Colorado adds
Colorado doesn’t have a separate capital gains tax. A taxable gain is included in your Colorado taxable income and taxed at the state’s flat income tax rate (4.4% for recent tax years; the rate can change from year to year, so check the current rate with your tax preparer). If your gain is fully excluded at the federal level, it generally isn’t taxed by Colorado either.
Also note that a loss on the sale of your personal home is not deductible.
Before you list: a quick checklist
- Find your closing statement from when you bought the home.
- Gather receipts for major improvements (roof, windows, additions, remodels).
- Get a realistic estimate of today’s value. Our home value guide explains how.
- Bring those numbers to a CPA before you sign a listing agreement, especially if you’re near the exclusion limit or the home was ever rented.
Frequently asked questions
Do I have to report the sale if I owe no tax?
If you receive a Form 1099-S from the title company, the IRS says you must report the sale even if all of the gain is excluded. Ask your tax preparer how to report it.
Can I avoid capital gains by buying another house?
Not for your main home. The old rollover rule ended in 1997. Today the exclusion is the main tool. A 1031 exchange applies only to investment or business property, not your residence.
Do I pay capital gains on a house I inherited and sold right away?
Usually little or none, because your basis steps up to the value at the date of death. You’d generally owe tax only on any increase in value after that date, minus selling costs.
Does Colorado have its own capital gains tax?
No separate tax. Taxable gains are taxed as part of your regular Colorado income at the state’s flat rate.
Thinking about selling?
I’ll give you a realistic value and net-proceeds estimate you can take to your CPA. Call us at (720) 403-2940, reach out here, or search homes for sale if you’re buying your next place.