Important Tax Considerations Every Real Estate Seller Needs to Know

Divesting real estate can be a financial windfall. However, it is important for a seller to know the tax implications when selling. Below are a few important tax considerations when thinking about selling your property.

1. There is an exclusion from capital gains tax on the sale of a principle residence of $500,000 for filing joint taxpayers ($250,000 exclusion of profit for single
taxpayer). This exclusion can occur every 2 years. The repetitive ability is a great opportunity to buy and sell a principle residence and either move up or buy down. There is no age restriction on who is eligible for this exemption. There are also tax consequences for the sale of a second home.

2. Investments in real estate.  Section 1031 of the U.S. Internal Revenue Code allows you to defer paying capital gains taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value.

3. 2% State of Colorado Withholding Tax.  Corporations that do not maintain a permanent place of business in Colorado, and nonresident individuals, estates and trusts are subject to Colorado income tax withholding on the sales of Colorado real estate over $100,000.  The withholding tax, if required, will be the smaller of:

  • Two percent (2%) of the sales price, rounded to the nearest dollar, or
  • The net proceeds from the sale. (“Net proceeds from the sale” means the net amount otherwise due to the seller on the settlement sheet.)

4. Foreign Owners.  The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. A disposition means “disposition” for the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc. Persons purchasing U.S. real property interests (transferees) from foreign persons, certain purchasers' agents, and settlement officers must withhold 15% (10% for dispositions before February 17, 2016) of the amount realized on the disposition (special rules for foreign corporations). Usually the transferee/buyer is the withholding agent. If you are the transferee/buyer you must discover if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.

* For these or any other tax law issues contact your accountant or tax advisor for further information and details.