What is the Colorado 2% Withholding Tax on Nonresident Real Estate Transactions?
It is crucial to understand the 2% withholding tax applied to nonresident sellers when selling a property in Colorado, . This mandatory withholding comes into effect for corporations lacking a permanent place of business in Colorado. Additionally, nonresident individuals, estates, and trusts when the sales price of Colorado real estate exceeds $100,000 are also subject to the tax.
Key Details
The title insurance company, its agent, or any other entity handling closing and settlement services calculate the 2% withholding tax as the lesser of 2% of the sales price or the net proceeds from the sale. At the time of closing, they withhold this tax and then send the withheld amount to the Colorado Department of Revenue. The Department of Revenue will then credit it to the seller’s income tax account as an estimated tax payment.
Filing Obligations
To navigate the tax forms correctly, individuals use specific forms. The DR 1083, titled “Information with Respect to a Conveyance of a Colorado Real Property Interest,” provides essential transaction details. Concurrently, the DR 1079, known as the “Payment of Withholding Tax on Certain Colorado Real Property Interest Transfers,” is mandatory when remitting the withholding tax. Both forms must be filed within 30 days of the closing date. The title company will typically handle this for you. (Ask your tax accountant about this!)
Exemptions and Exceptions
Are you unsure if you will need to pay the 2% withholding tax? Several exemptions exist that specify when the tax does not apply. These exemptions include:
- The selling price of the property being less than $100,000.
- The seller being an individual, estate, trust, partner, or partnership with both the federal Form 1099-S and the authorization for disbursement of funds showing a Colorado address.
- The seller being a government agency.
- The seller being a corporation incorporated under Colorado law or currently registered with the Secretary of State’s office as qualified to transact business in Colorado.
- The transferee (buyer) being a bank or a corporate beneficiary under a mortgage or under a deed of trust, and the property being acquired by foreclosure or by deed in lieu of foreclosure.
- The title company or entity providing closing or settlement services, has determined one of the following and has the seller sign an affirmation:
- Affirmation of Colorado Residency
- Affirmation of Permanent Place of Business
- Affirmation of Principal Residence
- Affirmation of Partnership
- Affirmation of No Tax Reasonably Estimated to be Due or No Gain on Sale
- No Net Proceeds (Example: 1031 Exchange)
In my real estate experience, navigating the 2% Colorado withholding tax has been an integral part of ensuring smooth transactions. The key to a successful real estate experience in Colorado is understanding the filing requirements, exemptions, and compliance measures. As regulations evolve, staying informed and seeking professional guidance remains crucial for a seamless and compliant process.
Please reach out to myself or your tax accountant if you are unsure what this means for you or have specific questions.
For filing instructions please refer to the form here from the Colorado Division of Real Estate.