If you own your personal residence in Colorado, you have probably noticed that your recent tax assessment increased by a large percentage. If you are planning to sell your home in the near future, the increased appreciation will result in the likelihood that you have a large capital gain tax bill to pay.
The Taxpayer Relief Act enacted in 1997 allowed for $250,000 exclusion of gain for a single person and $500,000 for a married couple when a personal residence was sold. The caveat was that the homeowner needed to live in the home for the previous two out of five years in order for the exclusion to apply. In 1997, that seemed like a lot of money! Back then, the average price for a home in Boulder County was about $200,000.
Compare it to this year, from January to May: the average price of a single family home in Boulder County is over $1,200,000, while in the City of Boulder for Q1 2023, the average price is almost $1,790,000. The Gain Exclusion has not been increased in 26 years. When the law was introduced, it meant that there wouldn’t be a capital gain tax bill for most American homeowners when they sold their homes. That might still be true in some markets, but in Boulder County and especially in the City of Boulder, home price appreciation has outpaced tax relief – and there doesn’t appear to be an increase in relief on the horizon.
As always, consult with your tax professional to determine which strategies are appropriate for you. A few ideas for eliminating or reducing capital gains tax when you sell your personal residence are as follows:
• Don’t sell. There is no tax due if you are not a seller.
• Refinance to pull cash out. Mortgage loan proceeds are not taxable.
• Keep a record of all capital expenditures on your home. Money spent on major capital expenditures are added to your basis, and therefore potentially reduce the tax liability.
• Shelter capital gains through Opportunity Zone Funds. This opportunity will end at the end of the 2023 calendar year. According to Chris Bryant of RBC Wealth Management in Colorado, an alternative to mailing your check off for the amount of the tax due is to invest in an Opportunity Zone Fund. In 2017, the Tax Cuts and Jobs Act created the Qualified Opportunity Zone Program to provide a tax incentive for private, long-term investment in economically distressed areas. An Opportunity Zone is a community, nominated by the state and certified by the U.S Treasury Department, qualified to be a part of the program. That act created 8,700 Opportunity Zones in all 50 states, including a few
• Opportunity Zone Funds are available for investors to defer and potentially reduce or eliminate tax on capital gains. The Fund Manager invests in a selection of Opportunity Zone projects. These investments are only available to Accredited Investors. An Accredited Investor is someone with at least $1 million in net worth or $200,000 of annual income as a single person or $300,000 for a couple.
• Investing in a Qualified Opportunity Zone Fund has several benefits. An investor with substantial capital gains tax liabilities from any (stocks, bonds, real estate, etc.) prior to investment can defer, reduce, and possibly eliminate the tax due if all the criteria are met. Tax savings are only available when an investor is willing to retain the investment in the Qualified Opportunity Zone Fund for specific periods of time. The greatest benefit occurs if the investment if held for 10 years.
• If you are going to invest in an Opportunity Zone Fund, you need to do it within 180 days of the sale of the appreciated asset. The investor may invest the return of principal as well as the capital gain, but only the portion of the investment attributable to the capital gain will qualify for the tax on any appreciation of the Opportunity Zone Investment.
• 1031 Exchange – On the surface, a personal residence DOES NOT qualify for a 1031 Exchange. A 1031 Exchange is a transaction where you trade your old investment property for another investment property and defer any tax if, in general, you trade up in value and debt. In order to enter into a 1031 Exchange with your personal residence, you must first convert it to a rental. Your CPA can help you outline a plan to make this happen. Then, once it is officially a rental, in the eyes of the IRS, you can exchange it for another property. If you just want to sell, pay the tax and move on, this plan won’t be for you. However, it is a plan that could create a family legacy. For example, exchanging the old personal residence for an apartment building could create an income stream for the family for years to come.
It takes a team with your CPA, financial planner and REALTOR® to come up with a plan that works just for you.
Learn more about the Colorado Opportunity Zone Program with interactive map at: oedit.colorado.gov/colorado-opportunity-zone-program
By Duane Duggan. Duane graduated with a business degree and a major in real estate from the University of Colorado in 1978. He has been a Realtor® in Boulder since that time. He joined RE/MAX of Boulder in 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: The Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail Duane at [email protected], call 303.441.5611 or visit boulderco.com.