A 1031 exchange is a tax strategy that allows you to defer paying capital gains taxes when you sell an investment property, as long as you reinvest the proceeds into a new, like-kind property. This means you can sell one property and buy another similar one without immediately paying taxes on any gains from the sale.
These like-kind exchanges are covered under Section 1031 of the Internal Revenue Code (hence the name "1031 Exchanges") and apply to federal capital gains taxes. However, each state has their own tax code, and may have different rules for real estate tax withholdings, the ability to complete a tax-deferred sale, or the rules around like-kind exchanges. Below we'll dive deep into these state-level specifics.
In Colorado, the real estate tax withholding rules require withholding 2% of the sales price or the net proceeds, whichever is less, when a nonresident sells a Colorado real property interest. However, there are exemptions available:
For more detailed information, you can refer to the Colorado Revised Statutes Title 39, Section 39-22-604.5, or visit the Colorado Department of Revenue website.
The Combined Rate accounts for Federal, State, and Local tax rate on capital gains income, the 3.8 percent Surtax on capital gains and the marginal effect of Pease Limitations (which results in a tax rate increase of 1.18 percent).
Colorado has a flat income tax rate of 4.63% of federal taxable income, regardless of income level.
Conducting a 1031 exchange in Colorado isn't unique relative to most states in the U.S. The rules and processes for a 1031 exchange, as outlined in Section 1031 of the Internal Revenue Code, apply uniformly across all 50 states. This means that the fundamental requirements, such as the need for the properties involved to be held for investment or productive use in a trade or business, and the like-kind nature of the exchanged properties, remain consistent whether the exchange involves properties in Colorado or elsewhere in the country.
Many states recognize and follow the federal rules for a qualifying 1031 exchange. We recommending reviewing these resources for 1031 exchanges at the federal level - learn about the rules for an exchange, the key deadlines you must meet, and why you are required to work with a Qualified Intermediary like Deferred.com.
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