Understanding 2% Withholding for Out-of-State Home Sellers
Colorado's 2% Withholding for Out-of-State Home Sellers
Selling a Colorado home after you have moved out of state comes with one surprise that catches a lot of people off guard. Right there on your closing statement, you will see a 2% withholding taken from your proceeds and sent to the State of Colorado.
Most sellers have never heard of this. Some think it is a penalty. Others assume they are being taxed on the full amount. Neither is true. Here is a plain-English explanation of what it is, how it works, and what you can do about it.
Quick Takeaways
- >If you sell a Colorado home as a non-resident, 2% is withheld at closing by law. >This only applies when the sale price is over $100,000. >It is not a penalty. It is a temporary hold on funds until you file your taxes. >You may be able to avoid it at closing by signing an affirmation on Form DR 1083. >If it is withheld, you can get most or all of it back when you file your Colorado tax return.
01 · The Basics
What Is the 2% Withholding?
When a non-resident sells a Colorado property for more than $100,000, Colorado law requires the title company to hold back 2% of the sale price at closing. That money is sent directly to the Colorado Department of Revenue.
Think of it as a deposit. Colorado wants to make sure that if you owe any state income tax on your gain, the money is already there. Since you no longer live here, the state has no easy way to collect after the sale is done. The withholding solves that problem.
It is not a penalty. It is not a final tax bill. It is simply a hold.
02 · Required by Law
Is It Mandatory?
Yes. Under Colorado Revised Statutes C.R.S. 39-22-604.5, the title company or closing agent is legally required to collect this withholding. The seller cannot skip it and plan to handle it at tax time. The title company must withhold the funds and send them to the state within 30 days of closing.
That said, there is one way to avoid it before closing.
Can You Avoid the Withholding at Closing?
At closing you will complete Form DR 1083. On that form you can sign an affirmation stating one of the following:
- >The property was your principal residence immediately before the sale >You are actually a Colorado resident >You reasonably estimate that no Colorado income tax will be owed on the gain
Important: This is a legal affirmation, not just a checkbox. Talk to your CPA before signing it. If you sign and it turns out you do owe tax, you are still responsible. Most title companies will still withhold by default as standard practice, even when an affirmation is available.
03 · The Math
How Much Is Withheld?
The withholding is the lesser of two amounts:
- >2% of the gross sale price, OR >Your net proceeds from the sale
Net proceeds means the amount you would actually receive after paying off your mortgage and other closing costs, before the withholding is applied.
Example A
You sell for $700,000. Two percent of that is $14,000. Your net proceeds are $80,000. The withholding is $14,000 because it is the smaller amount.
Example B
You sell for $700,000 but your net proceeds after paying off your mortgage are only $9,000. The withholding is $9,000, not $14,000. The state takes the smaller number.
04 · Getting Your Money Back
Do You Get the Money Back?
Very likely yes, at least some of it. After the year ends, you file a Colorado non-resident income tax return using Form DR 0104. On that return you report your actual gain from the sale. Colorado then compares what you actually owe to what was withheld. If the withholding was more than your real tax bill, you get a refund for the difference.
Many sellers get most or all of the withholding back.
Reduces Your Taxable Gain
- >What you originally paid for the home >The cost of improvements you made >Certain selling costs you can deduct
May Eliminate Tax Entirely
- >Lived there 2 of the last 5 years >Federal $250,000 exclusion (single) >Federal $500,000 exclusion (married)
A Real-World Example
You bought your home for $500,000, put $40,000 into improvements, and sold it for $700,000. Your gain before exclusions is $160,000. If you lived there long enough to qualify for the $500,000 primary residence exclusion, your taxable gain is zero. Colorado would refund the full amount withheld at closing.
05 · The Paperwork
What Forms Are Involved?
| Form | Who Uses It | What It Does |
|---|---|---|
| DR 1083 | Seller at closing | Reports sale details to the state. Seller can sign an affirmation here to avoid withholding if eligible. |
| DR 1079 | Title company | Submitted with the withheld funds to the Colorado Department of Revenue within 30 days of closing. |
| DR 0104 | Seller at tax time | Colorado non-resident income tax return. This is where you claim the withholding as a credit and request a refund if owed. |
All forms are available at the Colorado Department of Revenue website.
06 · Bottom Line
What You Need to Know
The 2% withholding is not money lost. It is Colorado making sure that if you owe state income tax on your sale, it gets paid. Most out-of-state sellers end up getting a refund once they file. The key is knowing it is coming, understanding your options at closing, and working with a CPA who can help you get back everything you are owed.
If you are planning to sell your Colorado home after moving out of state and want someone in your corner who knows how this works, we are here to help.
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Have Questions? Contact UsDisclaimer: This blog is for informational purposes only and does not constitute legal, tax, or financial advice. Tax rules and withholding requirements are subject to change. Always consult a licensed CPA or tax professional regarding your specific situation and applicable Colorado tax law.
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