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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
A Denver 1031 exchange can defer gain when you sell qualifying investment real estate and buy qualifying replacement property. This guide explains how I would review a Denver property or DST, with particular attention to rental licenses, energy upgrades, housing restrictions, and the cash those obligations require. A sound plan needs to fit both your exchange deadline and the building's real operating costs.
A property advertised as “Denver metro” may be outside the City and County of Denver. That matters. A nearby city's rental, land-use, and energy rules can differ from Denver's. Start with the parcel record and legal address, not the name used on the sales brochure.
I would create one file for each property. Include the current use, permits, rental license, tax bill, utility records, debt, and major repair history. For a multi-property offering, do not accept one summary paragraph as a substitute for the records behind each asset.
Then decide why you are exchanging. You may want to reduce the work of managing an older building. You may want steady income or less exposure to one area. A replacement that solves the management problem can still create a liquidity problem. I want to consider both before we discuss returns.
Section 1031 generally applies to real estate held for business or investment. It does not apply to a personal home simply because the owner wants to defer tax. Qualifying domestic real property outside Colorado may be a replacement. The ownership structure and how each property is held still need review. [1]
For a typical delayed exchange, arrange the qualified intermediary before closing. Replacement property generally must be identified in writing within 45 days after the sale. Acquisition generally must occur by the earlier of 180 days or the due date of your tax return, including extensions. The regulations also govern the identification list and your access to proceeds. Have the intermediary and tax adviser confirm the exact steps for your transaction. [2]
I would run a separate property review schedule. When can the engineer visit? When can the lender issue approval? When will the city answer a licensing question? A property can look suitable while one of those tasks makes its timing impractical.
Keep alternatives alive while the facts are checked. That does not mean identifying a long list without a plan. It means reviewing credible backups early and having the intermediary verify that the identification meets the rules.
Colorado's DR 1083 instructions describe real-estate sale withholding for certain sellers. The amount is generally the lesser of 2% of the sales price or net proceeds, subject to the instructions and exceptions. One possible exception involves a supported written affirmation that no Colorado tax is expected. This is withholding, not a flat tax on every Colorado sale. [3]
For an exchange, have the closing agent and tax adviser resolve the form before funds move. Do not assume “1031” printed on a closing file completes that step. Nor should you assume a withheld amount is the exact tax ultimately owed.
The distinction can matter for available cash. Two percent of a hypothetical $1.5 million sale price is $30,000. That example is not a withholding determination. It shows why a paperwork issue is worth addressing before the replacement purchase depends on every dollar.
Property tax is another calculation. Colorado uses actual value, assessment rules, and mill levies to determine the bill. Residential and nonresidential classifications can produce different treatment. Review the correct tax year and the applicable taxing districts, rather than multiplying the sale price by a familiar national average. [4]
I would request the actual notice and bill, then ask a local tax adviser to prepare the next-year estimate. Show any assumed tax savings separately. A hoped-for successful appeal should not be needed to make the base income work.
Denver generally requires a residential rental license for a dwelling offered or rented as a residence for 30 days or more. Its guidance requires a qualifying inspection, with stated exceptions. Licenses last four years unless ownership changes. They are not transferable, and a new owner must address a new license. [5]
This is a closing task, not merely a future renewal reminder. Before buying, confirm how the new owner should apply, which inspection materials can be used, and whether repairs must be completed. Match the licensed units and addresses to the rent roll.
A passing licensing inspection also has limits. The city says a multiunit inspection generally samples at least 10% of units, or one unit for a property with fewer than ten. That is not a complete condition assessment of every apartment, roof, and mechanical system. [5]
I would still commission the inspections needed for the acquisition. If the sample shows old plumbing or repeated moisture damage, expand the review. Ask how many similar units could need work and whether repairs can be done while tenants remain.
Check the operating file as well. There should be signed leases, deposit records, repair requests, and proof that required tenant information was supplied. The manager needs a system for keeping those records current after the sale. A clean folder at closing does not run the building for you.
Energize Denver has separate paths for buildings of 25,000 square feet or more and for smaller covered buildings. The current large-building guide says most buildings have an interim target in 2028 and a final target in 2032. Annual energy benchmarking is still due by June 1. Benchmarking means measuring and reporting energy use; filing the report is not the same as meeting the performance target. [6]
The August 27, 2026 rules retain detailed provisions for different paths, target changes, and timeline extensions. They also state that an approved extension notice sets the relevant compliance method and dates. I would not assume every building automatically has the general dates shown on a summary page. [7]
Ask for the property's building ID, latest accepted energy report, verified data, assigned target, and any approved changes. Then request the engineer's plan for meeting the target. A seller's claim that “we received an extension” needs the approval document and its terms.
I would ask the engineer three plain questions. What must change? What will it cost? When does the cash need to be spent? An answer that only names a future year leaves too much out. Equipment design, power needs, tenant access, bids, and installation can all have their own schedules.
Separate improvements already funded from those left for the buyer. Suppose the purchase budget includes a reserve for routine repairs but no money for a major heating upgrade. Calling the reserve “capital” does not make it large enough. Build a year-by-year cash plan that shows both routine work and the energy project.
Energize Denver's small-building program covers 5,000–24,999 square feet. Its main routes involve efficient lighting or renewable energy, with other options for qualifying situations. The owner must determine the building's route and submit the required proof. Being below 25,000 square feet does not by itself remove all duties. [8]
The August 2026 rules list these small-building deadlines, subject to approved alternatives or extensions: 20,000–24,999 square feet by December 31, 2026; 15,000–19,999 by December 31, 2027; 10,000–14,999 by December 31, 2028; and 5,000–9,999 by December 31, 2029. Confirm the city's recorded area and the specific building's status. [7]
For a smaller apartment property, the work may be manageable. The important point is to know what remains. Request invoices and submission receipts for completed upgrades. Check whether the city accepted the evidence. “The lights are LED now” is not the same as a completed compliance file.
I would also test who benefits from energy savings. If tenants pay the affected electric bills, the owner's operating income may not receive all the savings used in a payback estimate. The investment can still have value, but the cash-flow model needs the right beneficiary.
Denver's code guidance treats energy performance, building permits, and floodplain review as related but separate issues. It notes that construction within a regulatory floodplain, including an interior remodel, can require a floodplain permit. Its guidance also directs owners to rules for existing-building equipment and construction waste. [9]
That means a cost estimate should cover more than equipment. Ask about design fees, permits, electrical work, tenant protection, disposal, and the risk of finding more repairs once work begins. Have the local design team confirm the code edition and permits for the actual application date.
I would compare two plans. One replaces a worn system with the minimum immediate repair. The other coordinates necessary repairs with longer-term energy goals. The second may cost more up front, or it may avoid doing the same work twice. The bids and engineering should settle that question.
A DST sponsor should have the same conversation. Passive ownership does not make a building's repair bill disappear. It changes who makes the decision and which funds are available to pay for it.
Denver's Expanding Housing Affordability program applies to covered new development of ten or more dwelling units. Projects may provide on-site affordable units or meet an allowed alternative. Other development can owe linkage fees. The city's current guidance says on-site income-restricted units must remain affordable for at least 99 years. Project timing, location, chosen path, and exceptions matter. [10]
For an existing property, request recorded agreements and the approved housing plan. Identify each restricted unit, its allowed rent, tenant-income rules, and reporting duties. Do not assume a building is entirely market-rate because most apartments are advertised that way.
For an expansion or conversion, have the team calculate the applicable fee or unit obligation before setting the price. A preliminary concept may have changed since the seller first estimated the project. Check both the current requirements and any valid earlier approvals.
In the income model, separate restricted and unrestricted units. A forecast that raises every rent by the same percentage can miss the actual rules. I would rather see a clear unit schedule than a blended number that makes those differences hard to find.
Denver's short-term rental program covers stays of one to 29 days and requires the host's primary residence. The city defines that as the person's fixed home and usual place of return. A tax address alone does not establish it. Simply staying at a property when visiting Denver may not meet the rule. [11]
That local rule is distinct from the federal investment-use test for an exchange. You should not assume that buying a second house, putting it on a rental platform, and visiting occasionally satisfies both systems.
If a sales package relies on nightly revenue, stop and verify the legal use. Review the proposed operator, license path, HOA limits, insurance, and complete costs. Ask for a separate long-term rental model. If the deal only works as a nightly rental, you need a clear legal basis for that use before treating the income as dependable.
Colorado's radon law requires specified disclosure information for residential sales and leases, including known history and a warning. It provides remedies under stated conditions. A disclosure form tells you what must be communicated; it does not by itself prove a property has been tested or that an existing mitigation system still works. [12]
I would ask for tests by unit or location, mitigation records, service history, and the plan for any unresolved findings. Have qualified professionals decide whether more testing is needed. For a larger property, one old reading should not stand in for an informed review of the whole building.
Denver Water states that the customer owns the service line from the water main into the property. Its Lead Reduction Program investigates and replaces eligible lead service lines. Check the property's current inventory status and completed-work records with the utility. A planned replacement is different from a completed one, and the service line is different from the building's interior plumbing. [13]
For structural questions, Colorado Geological Survey identifies hazards such as swelling soils, subsidence, slopes, and flooding. Use its resources as a starting point, not a finding that every Denver property has those problems. An engineer should review the actual site and any signs of movement or water damage. [14]
I would connect those reports to the repair budget. A report filed away without a funded response does little for the investor. Ask which issues need work now, which need monitoring, and which require a more detailed study.
Consider an original example, not a current listing or projected offering return. An apartment building collects $720,000 per year after vacancy and concessions. Operating costs are $300,000. Loan payments are $245,000. Routine capital reserves are $35,000. That leaves $140,000 before investor-level taxes.
With $2.8 million of equity, the illustrated cash-on-cash rate is 5%, or about $11,667 a month. Now assume the owner must set aside another $50,000 a year for a planned upgrade and collections fall by $20,000. Cash available falls to $70,000, or about $5,833 a month and 2.5% on the same equity.
The building did not become worthless in the second case. It simply has less money available to distribute. That distinction matters if you need the income to pay living costs.
Ask whether a large project is funded at closing, funded over time, borrowed, or left for a future sale. Each approach changes risk. If financing is assumed, check the loan amount, interest cost, lender approval, and any limits imposed by the existing debt.
I would also avoid double counting. Money held back for capital work should not be shown as both an investor distribution and a future reserve. A projected energy saving should not appear before the equipment is installed and working.
IRS Revenue Ruling 2004-86 describes a DST structure in which investors are treated as owning interests in real estate for Section 1031. It does not make every trust interest eligible. The tax treatment of the actual offering needs review by your advisers. [15]
For a Denver DST, I would ask the sponsor to show the building records discussed here. How were energy costs estimated? Is the rental license current for the owner? What housing restrictions apply? How much cash remains after repairs and debt service?
Then review investor-level terms: fees, distributions, transfer limits, debt, and the exit plan. Private placements can be hard to sell and can result in a loss of principal. They may offer less public information than registered investments. A stated holding period or distribution is not a guarantee. [16]
The decision should reflect how you want to own real estate. A DST may reduce daily management, while direct ownership offers more control and more work. Either choice needs a clear budget, a realistic downside case, and room for unexpected costs.
No. Qualifying domestic investment or business real estate elsewhere may fit the federal like-kind rules. Your advisers still need to review ownership, investment use, deadlines, and state reporting. [1]
Do not assume so. Denver says residential rental licenses are not transferable and a change in ownership requires a new license. Address the inspection and application process before closing. [5]
No. The program's overview says most have that final target, but approved paths and notices control individual deadlines. Review the building's assigned target, reporting duties, and written approvals. [6]
Not necessarily. Buildings from 5,000 to 24,999 square feet have a separate program, with lighting, renewable-energy, and other allowed paths. Check the actual building's size, deadline, and status. [8]
Do not assume that plan qualifies for a Denver STR license. The city requires the operator's primary residence. That rule and the federal exchange investment-use test need separate review. [11]
No. Property costs can affect reserves, debt needs, and cash available for investors. Review the sponsor's plan and funding, along with the offering's limits on liquidity and distributions. [16]
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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