Capital gains tax on a house sale, federal and Colorado
How the gain is figured, who qualifies for the federal home sale exclusion, which rates apply to the rest, how Colorado’s income tax picks it up, and what changes for inherited houses and rentals.
Colorado has no separate capital gains tax. A taxable gain on a house is part of your federal taxable income, which is where the Colorado return starts. Most owners selling a main home owe nothing, because federal law excludes up to $250,000 of gain, or $500,000 on a joint return, after two of five years of ownership and use.
Most sellers owe less than they fear, and some owe nothing.
Amy and Jenny hear the tax question on almost every walkthrough, usually framed as a worry: if I sell, will a big piece go to taxes? For a house you have lived in for years, the answer is often no. Rentals and inherited houses follow different rules, and it pays to understand them before you set a price or a closing date.
This guide covers the federal rules from IRS Publication 523 and IRS Topic 409, the Colorado Department of Revenue’s treatment of the gain, and the inherited-property basis rule from IRS Publication 551. It is general information, not tax advice; confirm your numbers with a CPA or another tax professional before you sell.
One point first. How you sell does not change the tax. A listing and a sale to a cash buyer are taxed the same way. Only the numbers and your history with the house matter.
How the gain on a house is figured
Your gain is the amount you realize from the sale minus your adjusted basis. The amount realized is the sale price less your selling costs such as commission and the closing costs you pay. Your basis starts with what you paid for the house, including certain purchase costs, and goes up with the capital improvements you made over the years, such as a new roof, an addition, a furnace or a remodeled kitchen. Routine repairs do not count.
That is why records matter. An owner who bought for $180,000, added $60,000 in improvements and sells for $450,000 after $30,000 in selling costs has a gain of $180,000, before any exclusion. Without receipts for those improvements, the gain on paper is larger.
Dig out the closing statement from your purchase now. It is the starting point.
The home sale exclusion and the two-of-five-year test
Federal law lets you exclude up to $250,000 of gain from the sale of your main home, or up to $500,000 if you file a joint return with your spouse. To qualify you must have owned the home and lived in it as your main home for at least 24 months each during the five years ending on the date of sale, according to IRS Topic 701 and Publication 523. The two years do not need to be continuous.
There is a frequency limit. You generally cannot use the exclusion if you excluded gain from the sale of another home within the two years before this sale.
Sold sooner than two years because of a job change, a health reason or another unforeseeable event? Publication 523 describes a reduced exclusion for some of those cases, worked out as a fraction of the full amount. A tax professional can tell you whether yours qualifies.
If your gain is under the limit and you meet both tests, you may owe no federal tax on the sale at all. You may still need to report it, which the last section covers.
Federal rates on the taxable part
Gain above the exclusion, or gain on a house that does not qualify, is a capital gain. Under IRS Topic 409, if you held the house for more than one year, it is long-term and taxed at 0, 15 or 20 percent, depending on your taxable income for the year. Held one year or less, it is short-term and taxed at your ordinary income rates.
Two more federal items can apply. Gain that comes from depreciation you took on a rental is taxed at a maximum of 25 percent, and taxpayers with significant investment income may also owe the net investment income tax. The IRS adjusts the income brackets every year, so check the current figures for the year you sell.
How Colorado taxes the gain
Colorado does not tax capital gains separately. According to the Colorado Department of Revenue, Colorado income tax is based generally on federal taxable income, so a gain that is taxable on your federal return flows into your Colorado return and is taxed at the state’s individual income tax rate for that year. A gain fully covered by the federal exclusion never reaches the Colorado return.
The rate changes from year to year, which is why this guide does not print one. The Department of Revenue’s income tax guide lists the rate for each tax year. Colorado’s capital gain subtraction does not help with a typical house sale: since 2022 it is limited to taxpayers who file a federal farm schedule and sell qualifying agricultural land.
Moved out of Colorado before the sale? The Department of Revenue’s guide explains how Colorado income is apportioned for part-year residents and nonresidents, so ask your tax professional how the gain on a Colorado house is treated on your return.
Inherited houses and the stepped-up basis
An inherited house starts with a fresh basis. Under IRS Publication 551, the basis of inherited property is generally its fair market value on the date of the owner’s death, or on the alternate valuation date if the estate’s personal representative elects it. Decades of appreciation during the original owner’s life are not taxed to the heirs.
So an heir who sells soon after the death often has little or no gain. If the house is worth $420,000 on the date of death and sells for $425,000 a few months later, less selling costs, the taxable gain may be close to zero or even a loss. Get a date-of-death appraisal or a written broker’s opinion for the file; it is the number you will need.
Heirs who move in and live there can later use the main-home exclusion once they meet the two-of-five-year test themselves.
Read more: Sell an Inherited House: Belongings, Siblings, Distance, One Sale →
Rentals and second homes
The main-home exclusion is for your main home. A house that was only ever a rental or a vacation property does not meet the use test. The whole gain is taxable, and the part that came from depreciation you took, or could have taken, is taxed at up to 25 percent.
Landlords who once lived in the house have a more complicated calculation. Publication 523 covers the rules for a home that was partly used as a rental, and this is where a CPA earns the fee.
Read more: Sell a House With Tenants: Leases, Notice, Deposits, and Closing →
Reporting the sale
If the title company issues a Form 1099-S for the sale, you must report the sale on your return even if the whole gain is excludable. You also report it when you cannot exclude all of the gain. The IRS directs sellers to Schedule D and Form 8949 for that.
Keep the settlement statement from the sale with your purchase records, improvement receipts, permits and any appraisal.
A main home you owned and lived in or a rental or second home.
A main home you owned and lived in
- Exclusion Up to $250,000 of gain, or $500,000 on a joint return, if both tests are met
- Rate on the rest Long-term federal rates if held more than a year
- Depreciation Usually none to recapture
- Colorado Taxes only the gain that is taxable federally
A rental or second home
- Exclusion Not available if it was never your main home
- Rate on the rest Long-term federal rates on the whole gain if held more than a year
- Depreciation Taxed at up to 25 percent federally
- Colorado Picks up the taxable gain through federal taxable income
What to have on hand.
- The settlement statement from when you bought the house
- Receipts and permits for capital improvements
- A date-of-death appraisal, if you inherited the house
- Depreciation schedules from past tax returns, for a rental
- The settlement statement and any Form 1099-S from the sale
Questions homeowners ask us.
What is the capital gains tax rate in Colorado?
Colorado has no separate capital gains rate. A taxable gain is part of federal taxable income, which the Colorado return starts from, so it is taxed at the state’s individual income tax rate for that year. The Colorado Department of Revenue publishes the rate for each tax year.
What is the capital gains exemption on a home sale?
The federal home sale exclusion covers up to $250,000 of gain, or $500,000 on a joint return. You qualify if you owned the home and lived in it as your main home for at least two of the five years before the sale. You also must not have used the exclusion on another home in the prior two years.
Who pays capital gains tax when a house is sold?
The seller, on their own income tax return, and only on gain that is not excluded. The buyer pays no tax on your gain. Selling costs you paid reduce it.
How much tax would I owe on a $100,000 gain from selling a house?
If it is your main home and you meet the two-of-five-year test, likely nothing, because the gain is under the exclusion. On a rental held more than a year, the federal long-term rate is 0, 15 or 20 percent depending on income, plus Colorado income tax. Depreciation recapture may also apply.
Do I owe tax if I sell my house and do not buy another one?
Buying a replacement home no longer matters for a main home. The exclusion applies whether you buy again or rent, as long as you meet the ownership and use tests.
Does selling to a cash buyer change the capital gains tax?
The method of sale does not change the tax. A cash sale and a listed sale are taxed the same way. What changes is the price and your selling costs, which both feed into the gain.
Know the tax side, then compare offers.
Once your tax professional has run the numbers, a firm price is the last piece. Tell us about the house and within 24 hours of that conversation you will have a written cash offer that shows how we reached it. There are no fees or commissions.