Taxes When Selling a Colorado Vacation Home or Rental

Selling a Colorado vacation home or rental brings three federal tax items that a primary residence never does: capital gains tax on the full gain with no $250,000 exclusion, depreciation recapture on every dollar of depreciation you claimed or were allowed, and Colorado income tax on top at the state's flat 4.4 percent rate. A 1031 exchange defers all three when you buy another investment property on the IRS clock. This guide covers the Colorado version of each rule for owners in Breckenridge, Winter Park, Estes Park, Crested Butte and the Front Range, including the short-term rental license rules that now decide what a buyer will pay.

Is my Colorado property a vacation home or a rental in the eyes of the IRS?

The IRS sorts a second home by days, not by what you call it:

• Rented fewer than 15 days a year: the rent is not reported and no rental expenses are deducted. The home is a personal residence for tax purposes.
• Personal use over 14 days, or over 10 percent of the days it was rented at fair rent, whichever is greater: the home is a residence you also rent. Expenses are split between personal and rental days, and rental losses do not offset other income.
• Personal use at or under that line: the home is a rental property. Depreciation, management fees, cleaning, utilities and the rental share of mortgage interest are deductible, and the sale is taxed as an investment sale.

Days spent doing repairs full time do not count as personal use. Days a relative stays without paying fair rent do. Pull the calendar for the last five years before you list; it decides which rules below apply.

How is capital gain calculated on a Colorado rental sale?

Gain is the sale price minus selling costs minus adjusted basis. Adjusted basis is what you paid, plus closing costs on the purchase, plus capital improvements (a new roof after hail, a furnace, a deck, a finished basement), minus every year of depreciation you claimed or were entitled to claim. The IRS reduces basis by allowed depreciation whether or not you took it, so an owner who skipped depreciation for ten years still pays recapture on it.

Held longer than one year, the $330,000 is long-term capital gain, taxed federally at 0, 15 or 20 percent based on your taxable income in the year of sale. Held one year or less, it is taxed as ordinary income. Higher-income sellers also owe the federal net investment income tax on the gain. Every figure above is an example; your CPA runs the real one from your depreciation schedule.

What is depreciation recapture and why does it cost more?

Residential rental buildings depreciate over 27.5 years. Every dollar deducted lowered your taxable rental income in the year you took it. At sale, the IRS taxes that total back as unrecaptured Section 1250 gain at its own federal rate, which is higher than the 15 percent most sellers pay on the rest of the gain. In the example above, the $120,000 of recapture is taxed ahead of the $330,000 of capital gain, and it is never excluded, even when the home was your primary residence for part of the ownership.

Two things reduce it: capital improvements raise basis (keep every invoice), and a 1031 exchange defers it along with the capital gain.

Does Colorado tax the gain too?

Yes. Colorado has no separate capital gains rate. The federal gain, recapture included, flows onto the Colorado return and is taxed at the state's flat income tax rate of 4.4 percent. Colorado has no estate tax, no inheritance tax and no state real estate transfer tax, but four things at closing catch mountain-home sellers:

• Nonresident withholding. When the seller lives outside Colorado and the price is over $100,000, the title company withholds 2 percent of the sales price (or the net proceeds, if smaller) and sends it to the Colorado Department of Revenue as a prepayment. It comes back as a credit on the Colorado nonresident return.
• Town real estate transfer taxes. Breckenridge, Winter Park and Crested Butte each charge a town transfer tax at closing that pre-dates TABOR. Estes Park does not. Who pays it is negotiated in the contract; the title company quotes the exact percentage.
• Lodging and sales tax close-out. A short-term rental owner closes the state and local lodging tax accounts and files the final returns; Breckenridge, Winter Park, Estes Park and Crested Butte each collect their own.
• Property tax proration. Colorado property taxes are paid in arrears, so the seller credits the buyer for the current year's share at closing.

Can I use the $250,000 primary residence exclusion on a second home?

Only for the years you lived in it as your main home. The federal exclusion of $250,000 (single) or $500,000 (married filing jointly) requires two years of ownership and two years of use as your principal residence inside the five years before the sale. A Winter Park condo used on ski weekends never qualifies. A Denver house you rented out and then moved back into qualifies in part: for rental periods after 2008 the gain is split between qualified and non-qualified use by the calendar, and the non-qualified share is taxed. Depreciation recapture is never excluded.

Owners who move into a Front Range rental for two years before selling should log the move date, the driver's license change and the utility accounts as proof of residence. The group's home equity and net proceeds guide shows how the exclusion changes the net check.

How does a 1031 exchange work on a Colorado rental?

A 1031 exchange defers the capital gain, the recapture and the Colorado tax by rolling the sale into another investment property. The rules are fixed:

1. Investment property both ways. The property sold and the property bought are both held for investment or business use. Any real estate in the United States is like-kind to any other: a Crested Butte rental for a Lakewood fourplex, an Estes Park cabin for a Colorado Springs duplex.
2. A qualified intermediary holds the money. The intermediary is hired before closing and receives the sale proceeds. Money that touches your account is taxed.
3. 45 days to identify. Replacement properties are named in writing within 45 calendar days of closing on the sale.
4. 180 days to close. The purchase closes within 180 days of the sale, or by your tax return due date, whichever comes first.
5. Equal or greater value and debt. Buy for at least the net sale price and replace the loan paid off, or the difference is taxed as cash out.

A vacation home qualifies when IRS guidance is met: rented at fair rent for 14 days or more in each of the two years before the sale, with personal use under 14 days or 10 percent of rented days in each of those years. A home you used every summer and never rented does not qualify. Line up the replacement search before the sale closes; 45 days on the Front Range is two showing weekends. Start with homes for sale in Denver, then read the Colorado real estate investing guide and the duplex and multifamily buying guide for the replacement side.

How do short-term rental license rules change the sale?

In Colorado mountain towns the short-term rental license decides the buyer pool and the price. Nearly every town issues the license to the owner, not the property, so it does not transfer at closing, and towns with caps put the buyer on a waitlist. Confirm the current rule with the town clerk the week you list:

• Breckenridge: licenses are capped by zone with waitlists in the residential zones; a buyer in a capped zone applies and waits. Summit County has separate rules for unincorporated areas around Breckenridge, Frisco and Silverthorne.
• Winter Park: a town short-term rental license and a business license are required, and the buyer applies fresh. Grand County permits unincorporated Fraser Valley homes separately.
• Estes Park: vacation home registrations in residential zones are capped and waitlisted, and the registration does not transfer to a buyer in those zones. Commercial-zone registrations follow different rules.
• Crested Butte and Mt. Crested Butte: the Town of Crested Butte limits unlimited-use licenses and the license does not follow the home; Mt. Crested Butte and unincorporated Gunnison County each run their own program. Our Crested Butte and Gunnison site covers valley listings and local rules.
• Denver: short-term rentals are licensed only in the host's primary residence, so a Denver investor property sells as a long-term rental. Read the Denver short-term rental eligibility guide.

Sell the rental history, not the license. Two years of booking records, occupancy, average nightly rate and expense statements are what a buyer's lender and CPA ask for, and a listing that leads with them prices higher.

What records do I need before listing?

• Closing statement from your purchase and every refinance.
• Depreciation schedules from each year's return (Form 4562 and Schedule E).
• Improvement invoices: roof, furnace, windows, deck, remodel, hot tub.
• Personal-use and rental calendars for the last five years.
• Lodging tax filings and the town license.
• Current leases or booking contracts a buyer inherits.

Timing the sale and the mountain market

Mountain listings show best from late May to early October, when the roads are dry and the decks are usable; Front Range rentals list year-round. Selling in a year when your other income drops moves more of the gain into the 0 or 15 percent federal bracket, and a January closing pushes the tax bill a full year out. The group's Smart Pricing Report prices a mountain or rental property on comparable sales plus the rental income, and the Colorado market reports show what closed last month.

Buyers of Colorado second homes and 1031 replacement properties finance them with second-home or investment loans that carry larger down payments and their own rate sheets. Mike Oswald, VP of Mortgage Lending at Rate, NMLS 261003, Equal Housing Lender, pre-approves both. You are free to use any lender. See Kenna financing.

Confirm every figure in this guide with a Colorado CPA or tax attorney before you sign a listing agreement; your numbers depend on your return.

Where to go next

• How the Kenna Real Estate Group helps sellers
• How to sell a house in Colorado
• The Colorado home seller's guide
• Tax-smart strategies for Colorado real estate investors
• What to know before buying a mountain home in Colorado
• Colorado short-term rental property managers
• Meet the Kenna Real Estate Group agents

Talk to the Kenna Real Estate Group

The Kenna Real Estate Group at Keller Williams DTC sells rentals and second homes across the Front Range and works with mountain-town owners on timing, pricing and the 1031 replacement search, alongside your CPA and a qualified intermediary. Call or text 303-955-4220. A live person answers. Not a robot, not a phone tree. You can also search every home for sale in Colorado.