Is your seller a resident of Colorado? If not, the title company may be required to withhold proceeds of the sale for Colorado income tax.
When Does Withholding Apply?
The Colorado Department of Revenue requires withholding from sale proceeds anytime the seller is a nonresident and the sales 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 smaller of:
- 2% of the sales price (gross sales price not net proceeds), or
- the net proceeds from the sale.
(Net proceeds is defined as the net amount that would otherwise be due to the seller on the settlement sheet).
For example, if you have a sales price of $200,000 with the seller netting $45,000 from the sale prior to the nonresident withhold, the withholding would be $4,000 (2% of the sales price). If on the other hand, the $200,000 sales price only nets the seller $3,000, the withholding would be $3,000.
Are There Exceptions to the Withholding?
At closing, the seller will be required to answer questions on a form called the DR 1083 (Information with Respect to a Conveyance of a Colorado Real Property Interest). If the seller is a non-resident, there are two situations in which the withholding will not be required:
- There are no net proceeds from the sale, or
- The seller signs the following affirmation that no Colorado income tax will be due on the sale.
The seller choosing this option should obtain advice from the seller’s accountant to make sure this affirmation can be made truthfully.
What Happens to the Withhold?
The title company will remit the withholding tax to the Colorado Department of Revenue where it will be credited to the seller’s income tax account as an estimated payment. When the seller files its Colorado income tax return, the seller can claim credit for the estimated payment against the seller’s actual income tax liability.