If your seller lives outside Colorado, part of their sale proceeds may be withheld at closing for Colorado income tax. Here's how it works and how to plan for it.
What Is Colorado Form DR 1083?
Form DR 1083 (Information with Respect to a Conveyance of a Colorado Real Property Interest) is the Colorado Department of Revenue form that reports a real estate sale and determines whether tax must be withheld from a nonresident seller's proceeds. It's required under C.R.S. § 39-22-604.5 and is completed at closing by the title company.
When Does Withholding Apply?
Withholding is required when both of these are true:
- The sales price is more than $100,000.
- The seller is a nonresident. For individuals, estates, and trusts, this means a non-Colorado address appears on the federal Form 1099-S or on the disbursement instructions. For corporations, it means the company has no permanent place of business in Colorado (it isn't organized in Colorado, isn't registered with the Colorado Secretary of State, and has no staffed office in the state).
Co-owners, such as spouses or joint tenants, are evaluated individually.
How Much Is Withheld?
The title company withholds the lesser of:
- 2% of the gross sales price, or
- 100% of the seller's net proceeds (the cash due to the seller on the settlement statement before withholding).
Scenario A | Scenario B | Scenario C | |
|---|---|---|---|
Sales price | $500,000 | $500,000 | $500,000 |
Payoffs & closing costs | $300,000 | $492,000 | $505,000 |
Net proceeds | $200,000 | $8,000 | $0 |
Amount withheld | $10,000 (2%) | $8,000 (net proceeds) | $0 |
A seller never has to bring cash to closing to cover withholding. If net proceeds are $0, nothing is withheld, but the DR 1083 is still filed.
Exemptions: When No Withholding Is Required
Withholding doesn't apply if the sales price is $100,000 or less, or if there are no net proceeds. A nonresident seller can also avoid withholding by signing an affirmation on Page 2 of the DR 1083, under penalty of perjury, that no Colorado income tax will be due on the sale. Common situations include:
- Primary residence: The gain qualifies for the federal principal residence exclusion (IRC § 121), generally meaning the seller owned and lived in the home at least 2 of the last 5 years.
- Sale at a loss: There is no taxable gain on the sale.
- Inherited property: A stepped-up basis results in little or no gain.
- 1031 exchange: The gain is deferred under a qualifying exchange.
Vacation homes, second homes, and rentals don't qualify for the primary residence exclusion. Withholding usually applies to them unless the sale produces no taxable gain. Commercial property follows the same rules as residential property. For LLC sellers, the treatment depends on how the LLC is taxed.
Sellers should confirm with their CPA before signing an affirmation. Selling inherited property? See our Estates and Probate guide.
What Is Form DR 1079?
Form DR 1079 (Payment of Withholding Tax on Certain Colorado Real Property Interest Transfers) is the voucher the title company uses to send withheld funds to the Colorado Department of Revenue. It's filed together with the DR 1083 within 30 days of closing. If nothing is withheld, no DR 1079 is filed. The seller receives a copy as proof of payment.
What Happens to the Withheld Amount?
The withholding is not an extra tax. It's an estimated tax payment credited to the seller's Colorado income tax account. When the seller files their Colorado return, the withholding counts against what they actually owe.
- If the withholding exceeds the actual tax, the state refunds the difference.
- If the actual tax is higher, the seller pays the balance.
Do Nonresident Sellers Have to File a Colorado Tax Return?
In most cases, yes. A nonresident with Colorado-source income, including a gain from Colorado real estate, files Form DR 0104 with Schedule DR 0104PN. Filing is also the only way to get back any excess withholding, which is common because withholding is based on the sales price, not the gain.
If no tax was withheld and the sale produced no Colorado taxable income, a return may not be required. Confirm this with a tax professional.
Does Colorado Tax Capital Gains on Real Estate?
Yes, but there's no separate capital gains rate. Gains are taxed as ordinary income at Colorado's flat income tax rate of 4.40%, whether the property was held short-term or long-term. The tax applies to the net gain (sales price minus adjusted basis and selling costs), not the sales price.
Example: A nonresident sells a rental for $500,000. The adjusted basis is $300,000 and closing costs are $30,000, so the gain is $170,000. Colorado tax is $170,000 × 4.40% = $7,480. Since $10,000 was withheld at closing, the seller receives a $2,520 refund.
Does Colorado Have an Exit Tax?
No. Colorado doesn't tax anyone for moving out of the state. The 2% nonresident withholding is often mistaken for an exit tax, but it's only a prepayment of income tax owed on a Colorado property sale, and any excess is refunded.
Is There a Real Estate Transfer Tax in Colorado?
Colorado has no statewide transfer tax, only a small state documentary fee charged when the deed is recorded. However, some mountain resort towns, including Aspen and Vail, impose their own local real estate transfer taxes.
FAQs
Is the 2% withholding avoidable? Yes, if the seller can truthfully affirm on the DR 1083 that no Colorado income tax will be due, such as when the sale qualifies for the primary residence exclusion or produces a loss.
Does withholding apply to vacation property? Usually. Second homes don't qualify for the primary residence exclusion, so withholding applies unless the sale produces no taxable gain.
Does it apply to commercial property? Yes. Commercial and residential sales follow the same rules.
Can I get the withheld money back? Yes. File a Colorado return (DR 0104 with DR 0104PN) and claim the withholding as a credit. Any excess is refunded.
Who files the DR 1083 and DR 1079? The title company or closing agent, within 30 days of closing.
Selling Colorado Property from Out of State?
First Alliance Title handles DR 1083 and DR 1079 compliance at every closing, so out-of-state sellers and their agents know exactly what to expect before closing day. Want to estimate proceeds first? Use our rate cards and net sheets, or contact our team to get started.
This article is for general information only and is not tax advice. Consult a CPA about your specific situation.
