Can’t Sell House Because of Tax Rate In Colorado

Property Tax

When you own a house, you are required to pay property tax. You are legally obligated to keep paying the tax until the close of the sale when the house is transferred to the new owner. The cash home buyer then takes up payment of the original property tax henceforth.

If you owe on property tax, you have to pay the amount owed before the close of the home. Otherwise, your local government will have a tax lien on the property, and the amount owed will be deducted from the sale proceeds. 

If your mortgage lender is in charge of paying your property tax, they will incorporate it in the payoff along with the remaining mortgage payment.

The property tax is accrued in arrears and should be paid twice annually. The payable property tax varies from state to state. Colorado is among the states with the lowest property tax at 0.55%.

Select categories of properties that are exempt from property taxes. These include religious, nonprofit, and government properties. 

For residential houses, seniors, veterans, people living with disabilities, and low-income individuals may be eligible for property tax relief. Otherwise, you must pay any amount owed by closing the house sale.

Real Estate Transfer Tax

Part of closing costs includes the real estate transfer tax. It is also known as title fee or government transfer tax. 

It is calculated as a percentage of the sale price of the house. The actual estate transfer tax rate varies from state to state. 

However, according to Zillow, the median transfer tax in the US is $745. Notably, Colorado is among the states with the lowest median property transfer tax at $41.

Excise Tax

Some local and state governments levy a real estate excise tax (REET) on the sale of a property. 

Technically, the cash buyer is liable for the excise tax, but the seller remits it. Therefore, some sellers opt to include it in the house’s closing costs.

The excise tax is usually calculated as a percentage of the house’s sale price. It is calculated based on the excise rate stipulated by the local government where the sale closes.

The way it works is that at the close of the sale, the seller takes out the excise tax from the closing costs and pays it to their real estate attorney or escrow agent. 

The real estate professional then fills the relevant documentation, e.g., a real estate excise tax affidavit or tax form, and makes payments to the relevant government entity.                                

Capital Gains Tax

Capital gains tax is a type of tax paid on profits made from the sale of an asset. It applies to stocks, bonds, cars, boats, and real estate. It is calculated as the difference between the total cost of buying the house and its sale price.

If you have made any improvements to the house, they will be factored into the cost of the house. The exact rate varies from state to state and whether you are eligible for a full or partial exclusion.

There are two main types of capital gains tax rates depending on how long you have owned the house. Your normal tax income rate applies if you have owned the house for less than a year. 

On the other hand, if you have owned the house for more than a year, the long term capital gain rate is 15-20% depending on your income bracket and filing status.

Capital Gains Tax Exemptions

Whether you are eligible for a capital gains tax exemption depends on factors such as:

• The type of property
• Assessed value of the property
• How much has the property has appreciated by
• Whether or not you are married and file taxes jointly with your spouse
• Whether you are divorced
• How long have you owned the house, and if you have been living in it

Most homeowners are eligible for a capital gain exemption when selling their primary home. However, there are specific conditions to be met as follows:

• You must have owned the house for at least 5 years
• Of the 5 years, you must have lived in the house for at least 2 years
• The profits on the house should not exceed $250,000 for individuals and $500,000 for married couples

If the profits exceed $250,000 for individuals and $500,000 for married couples, the capital gains tax rate will be applied to the amount in excess. 

Note that to be eligible for the tax exemption as a couple, you should file for tax jointly. One or both of you must have owned the house for at least 5 years, and both should have lived there for a minimum of 2 years.

In the case of a divorce or death, the time your ex-spouse or decedent lived in the house as their primary residence counts towards the minimum two-year residency requirement. 

The two-year minimum residency requirement is waived for military or government intelligence employees if you have been stationed at least 50 miles away from the house.

Even if you are not eligible for a complete exclusion, you may qualify for a partial exclusion. For instance, if a divorce, health issue, relocation, or job change made it impossible to live in the house for at least two years. 

The capital gains exclusion for the real property would be calculated based on the percentage of time you lived in the house for the two years.

Note that once you claim a capital gains exemption, you do not qualify for another one in the next two years as the property owner.

Below are the specific circumstances under which a property owner will be ineligible for capital gains tax exclusion:

• If it is a holiday home, rental property, or investment property
• If you are eligible for expatriate tax
• If you bought the house through a like-kind exchange
• If you or your spouse has not lived in the house for at least 2 years