Homeowners in Colorado have seen significant property value appreciation over the last two decades, leading to potential tax consequences. Nearly 60% of homeowners exceed the $250,000 capital gains exclusion for individuals, and 18.2% exceed the $500,000 cap for married couples. The capital gains exemption limits, set in 1997 and not adjusted for inflation, are significantly lower than current home values. Additionally, Colorado's taxation of capital gains as ordinary income compounds these tax liabilities, with many homeowners unexpectedly facing large tax bills as home values rise.
The capital gains exemption was designed to allow homeowners to keep profits on the sale of their primary residence-$250,000 for single sellers and $500,000 for joint filers. But these limits haven't been adjusted for inflation since they were introduced in 1997.
Over that time, home values nationwide have increased by more than 260%. If the caps had kept up, they would now be over $660,000 and $1.32 million, respectively.
Adding to the burden, Colorado taxes capital gains as ordinary income, with a flat state income tax rate of 4.55%. When combined with federal capital gains taxes, sellers can owe tens of thousands on their home sale.
More than half of all homeowners in the state are now above the $250K threshold, and nearly 1 in 5 exceed the $500K limit. This is no longer just a luxury market issue-it's a mainstream one.
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