1031 Exchange Colorado: State Tax, 2% Withholding and Forms

Key takeaways

• Colorado's income tax begins with the federal taxable income on your IRS return. So when a completed exchange defers the gain federally, Colorado generally doesn't tax it either.
• The Colorado Department of Revenue's 2025 booklet says, "The income tax rate is currently 4.4%." For a resident with a large gain, that state layer sits on top of federal tax of up to 20%, 25% and 3.8%.
• When a nonresident sells Colorado real estate for more than $100,000, the closing agent generally withholds the lesser of 2% of the sales price or the net proceeds. Forms DR 1083 and DR 1079 handle the reporting and payment within 30 days of closing.
• Withholding doesn't apply if the seller signs one of five affirmations, including one that no Colorado tax is reasonably expected on the gain. A properly planned exchange is where that affirmation usually comes up.
• Boot, meaning cash or debt relief you don't reinvest, is taxable in Colorado at the same flat rate. A Delaware Statutory Trust (DST) interest can qualify as replacement property, but DSTs are illiquid and distributions are not guaranteed.

How does Colorado tax a gain on investment real estate?

Colorado has a flat income tax. It doesn't have a separate capital gains tax with its own brackets. A gain from selling a rental is part of your income, and Colorado taxes it at one rate.

It starts with your federal return

The Colorado Department of Revenue's 2025 Individual Income Tax Filing Guide (Book 104) explains the starting point: "Colorado income tax is based on your federal taxable income, which has already considered your deductions."

That one sentence explains why a federal 1031 exchange works for Colorado tax. If a completed exchange keeps your gain out of federal taxable income, it isn't in the number Colorado starts with. You don't need a separate Colorado election to defer the gain.

The rate

The same guide says, under the line for Colorado tax, "The income tax rate is currently 4.4%." That's the rate the guide gives for tax year 2025. When the 2026 booklet is published, check it for the rate that applies to 2026 sales.

No general capital gain break for rentals

Some investors ask about a state capital gain subtraction. The 2025 guide describes a capital gain subtraction only for farmers. It applies "If you are required to file federal Schedule F (Profit or Loss from Farming), and you sold agricultural land in Colorado," and "The amount of this subtraction is limited to $100,000."

So if you're selling an apartment building in Aurora or a retail strip in Grand Junction, don't plan on a state subtraction to soften the bill. The 4.4% applies to the gain that reaches your federal taxable income.

Who files in Colorado

The guide lists who must file. One group is anyone "Not a Colorado resident, but received income from Colorado sources." Nonresidents and part-year residents file the regular return with Form DR 0104PN, and "Tax is prorated so that it is calculated only on income received in Colorado or from sources within Colorado." A gain on Colorado real estate is Colorado-source income.

The federal rules, in one paragraph

Colorado follows the federal outcome, so the federal rules decide whether your exchange works. Under 26 U.S.C. § 1031, you trade real property held for investment or business use for other like-kind real property, and real property inside the U.S. isn't like-kind to real property abroad. A qualified intermediary must hold the sale money. You must name replacement property in writing within 45 days of the sale. You must close within 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first. If you want the details on debt, title and reporting, my guide to the federal 1031 exchange rules walks through all of them.

How much tax can a 1031 exchange in Colorado defer?

For a Colorado resident, there are four layers to think about on a long-held rental. Three are federal and one is Colorado.

Where does the 20% start? The IRS 2026 inflation update, Rev. Proc. 2025-32, puts the 15% capital gains rate's ceiling at $613,700 for married couples filing together and $545,500 for single filers.

The depreciation portion is often the piece people forget. My guide on how depreciation is taxed when you sell explains where that 25% comes from.

Worked example: a Fort Collins fourplex

The fourplex below is made up. Its prices and costs are invented round figures, it isn't a client or an offering, and it isn't typical of any deal. To keep the math readable, I apply Colorado's 4.4% straight to the gain.

The setup

Say you're married, you live in Denver, and you bought a fourplex in Fort Collins in 2012 for $750,000. You've taken $280,000 of depreciation, which brings your adjusted basis (what you paid, plus improvements, minus depreciation) to $470,000.

You sell in 2026 for $1,250,000 and pay $55,000 in selling costs. You still owe $400,000 on the loan.

Your gain is $1,250,000 − $55,000 − $470,000 = $725,000.

If you sell and pay the tax

Suppose your salary and other income already place you at the top of the federal rate schedule.

Your net equity after the loan payoff is $1,250,000 − $55,000 − $400,000 = $795,000. After about $218,450 of tax, you'd have roughly $576,550 left to invest.

If you complete a full exchange

You reinvest all $795,000 and buy property worth at least $1,195,000, the net sale price. Federal and Colorado tax of about $218,450 is deferred. Of that, $31,900 is the Colorado share.

The deferral isn't forgiveness. Your old basis carries into the replacement property. If you sell it later for cash while you're a Colorado resident, both the federal and Colorado tax come back into play.

The takeaway

In this example, the Colorado layer is about 15% of the total bill. It's smaller than the federal piece, but $31,900 is still real money, and the exchange defers it along with the federal tax.

What is Colorado's 2% withholding for nonresident sellers?

This is the Colorado rule I'd want an out-of-state owner to know about before listing. It can hold back money at closing.

The basic rule

When someone sells a Colorado real property interest, the person handling the closing has duties. The Department of Revenue's Form DR 1083, "Information with Respect to a Conveyance of a Colorado Real Property Interest," opens with this: "In general, anyone who provides closing and settlement services for the conveyance of a Colorado real property interest must comply with certain withholding and reporting requirements."

The withholding agent is usually the title company or its agent. The form defines the role by category, including a title insurance company, an attorney, a bank, or another business providing closing services.

How much is withheld

The amount is the lesser of 2% of the sales price or the net proceeds otherwise due to the seller. The form defines the sales price to include cash paid, the fair market value of other property, and "the outstanding amount of any liability assumed by the transferee."

No withholding applies when "The sales price, as defined below, is $100,000 or less."

One detail matters for exchanges. The form's definition of sales price also counts "the fair market value of other property transferred or to be transferred," so a deal paid partly in property is measured at its full value. But the withholding can never be more than the net proceeds due to the seller, and the form lists "No net proceeds" as a reason for no withholding. Your title company will apply both tests to your closing statement.

The exceptions

The form lists five affirmations that a seller can sign to stop withholding. Here they are in plain English:

1. Colorado resident. The seller is a Colorado resident at closing.
2. Corporation with a Colorado place of business. The seller is a corporation that keeps a permanent place of business in Colorado.
3. Principal residence. The property was the seller's principal residence that could qualify for the federal home-sale exclusion (Section 121).
4. Partnership. The property was sold by a partnership under Section 761(a) of the Internal Revenue Code.
5. No reasonably estimated tax. The seller affirms "there will be no Colorado income tax reasonably estimated to be due" on any gain realized on the transfer.

The form also lists "No net proceeds" as a reason no withholding applies. The general instructions say the withholding agent may rely in good faith on the seller's signed affirmation.

Where a 1031 exchange fits

The form doesn't have a box labeled "1031 exchange." The affirmation that usually comes up in an exchange is number five. The form warns: "Please understand before you sign this affirmation that nonresidents of Colorado are subject to Colorado tax on gains from the sale of Colorado real estate to the extent such gains are included in federal taxable income."

Read that sentence closely. A gain deferred in a completed 1031 exchange isn't included in federal taxable income. But the affirmation is "Signed under the penalty of perjury," and it covers the whole transaction. If you expect boot, or if your exchange might not be completed, there may be Colorado tax due. Decide with your CPA whether you can honestly sign it.

Deadlines and credit

The withholding agent must file Form DR 1083 within 30 days of the closing date. The payment goes in with Form DR 1079, and the form says to send it with the DR 1083 "within 30 days of the date of closing."

Money withheld isn't lost. The DR 1079 says the amount is "credited to the Colorado income tax account of the transferor," and the seller "must claim credit for the payment on the Colorado income tax return." If the withholding turns out to be more than your Colorado tax, the return is how you get the excess back.

A note on exchange funds

In an exchange, sale proceeds normally go to your qualified intermediary. If 2% is withheld from the price, that money goes to Colorado, not to the intermediary, so you have less cash to reinvest. Unless you add other money, that shortfall can leave you with taxable boot. Sorting out the affirmation before closing helps avoid that.

Worked example: an out-of-state owner sells a Colorado rental

Here's a second made-up case, with invented numbers that don't reflect any real sale.

The setup

Say you live in Arizona and own a rental condo in Breckenridge. You bought it for $500,000 and have taken $90,000 of depreciation, so your basis is $410,000. You sell it for $900,000 with $40,000 of selling costs and a $250,000 loan payoff.

Your gain is $900,000 − $40,000 − $410,000 = $450,000. Your net proceeds are $900,000 − $40,000 − $250,000 = $610,000.

Without an exception

The sale is above $100,000, and you're not a Colorado resident. The withholding is the lesser of 2% of $900,000, which is $18,000, or the $610,000 of net proceeds. So the title company withholds $18,000 and sends it to Colorado.

If you were doing an exchange, only $592,000 would reach your intermediary instead of $610,000.

With a completed exchange and the affirmation

Say your CPA confirms you're doing a full exchange, with no boot expected, into a building in Mesa, Arizona. With your CPA, you decide you can sign affirmation five. No withholding is taken, and all $610,000 goes to your intermediary.

If the exchange fails

Now say your replacement deal falls through on day 170 and you don't close in time. The $450,000 gain becomes taxable. Colorado can tax it as Colorado-source income of a nonresident. At the 4.4% rate in the 2025 guide, that would be about $19,800. You'd file a Colorado return with Form DR 0104PN.

That's why a backup plan matters. My guide to the 45-day identification rules explains how to name more than one property so a single failed deal doesn't sink the exchange.

Colorado residents buying replacement property outside Colorado

Many Colorado owners sell in the Front Range and buy somewhere else. Here's how the state lines work.

Colorado still taxes you while you live here

Colorado taxes residents on income from everywhere. If you exchange a Denver building for a Texas building, then later sell the Texas building for cash while living in Colorado, the gain is in your federal taxable income. Colorado starts from that number.

The other state may also tax it

The state where the replacement property sits may tax a nonresident's gain on property there. If it does, Book 104 says "Colorado resident individuals may claim a credit for income tax accrued to another state for the same tax year." The credit is figured on Form DR 0104CR. It's meant to keep you from paying full tax twice on the same income, though the credit has limits your CPA will work through.

Checking the other state's rules

Every state sets its own rules for nonresident sellers, withholding and deferred gain. My state-by-state 1031 tax overview gathers those rules in one table and links to the individual state pages, so you can check the replacement property's state before you identify it.

If you move away first

If you leave Colorado and later sell the replacement property while living elsewhere, ask your CPA how Colorado treats gain that was deferred from Colorado property. Colorado's withholding form ties a nonresident's Colorado tax to gain "included in federal taxable income," and your situation will turn on the facts.

Moving from California to Colorado

If your chain of exchanges started with California property, California has its own rule. The FTB 3840 instructions require an annual filing from anyone who exchanged California property for property outside California, "regardless of residence status." That filing continues "for each subsequent taxable year" until the California gain is recognized. A Coloradan with a California past should keep filing it.

What about boot in a Colorado exchange?

Boot is anything you receive in an exchange that isn't like-kind real property. The most common kinds are cash you keep and a smaller loan on the new property that you don't make up with new cash.

Boot is taxable up to the amount of your gain. Because Colorado starts from federal taxable income, boot that's taxable federally flows into your Colorado return at the state rate.

A quick example

This is hypothetical. Say you're a Colorado resident and you keep $80,000 of cash from your intermediary to pay down a home loan. If all $80,000 is taxable gain, Colorado tax at the 2025 rate would be about $80,000 × 4.4% = $3,520. Federal tax on the same $80,000 would depend on how much is depreciation-related and on your bracket.

Estimated tax

Book 104 says that if you expect your next year's Colorado tax liability to be more than $1,000 after credits, you should make estimated payments using Form DR 0104EP. Boot can push you over that line. If you underpay, you may owe a penalty figured on Form DR 0204.

My guide to partial exchanges and boot covers how cash and debt boot are measured and how to avoid them.

Year-end sales: Colorado's filing dates and your 180 days

The calendar matters more than people think when a Colorado sale closes in the fall or winter.

Why the return due date can cut your exchange short

The federal deadline is 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first. If you sell on December 1, day 180 lands in late May. But an individual's federal return is normally due in mid-April. Unless you extend the federal return, the April date ends your exchange period early.

The fix is simple: extend your federal return before the April due date. Your CPA will usually handle this when an exchange is still open.

What Colorado's dates do and don't do

Book 104 says Colorado returns and payment are "due April 15." It adds, "An automatic extension to file is granted until October 15, but there is no extension to pay."

Two practical points follow. First, Colorado's automatic extension doesn't extend your federal return, and the federal return date is the one that limits the exchange. Second, if part of the exchange turns out to be taxable, such as boot, the Colorado tax on it is still due by April 15 even if you file in October. Pay an estimate with the extension to avoid interest and penalties.

Does a mountain vacation home qualify?

Colorado owners often ask about cabins, ski condos and other second homes. The answer turns on how you used the property, not where it sits.

The statute protects only real property "held for productive use in a trade or business or for investment." A home you mostly use yourself is generally a personal asset, not an investment, so it usually won't qualify. A condo you rent out to guests most of the year and rarely use yourself has a much stronger case.

Your rental records will matter. Keep the booking history, the days you or family stayed there, and the property's income and expense reports. Ask your CPA to review them before you list, because the same records will support your Form 8824 if the IRS ever asks.

The same test applies to the replacement property. If you plan to buy a new mountain condo and spend a lot of time in it, talk with your CPA first.

Deeds, the documentary fee and the TD-1000

A 1031 exchange defers income tax. It doesn't change what you pay to record a deed.

Colorado charges a state documentary fee on many deeds, under section 39-13-102 of the Colorado Revised Statutes. Your title company figures the amount on both your sale and your purchase.

Deeds subject to that fee must also come with a Real Property Transfer Declaration, Form TD-1000, when they're recorded. A Colorado Department of Regulatory Agencies advisory on the TD-1000 explains what happens if it's missing. The county assessor sends a notice. If a completed form isn't returned within 30 days, "the assessor may impose a penalty of $25.00 or 0.025% (0.00025) of the sale price, whichever is greater."

In a normal closing, the title company handles this. It's worth knowing about because the TD-1000 asks about the sale price and terms. Your answers should match the exchange documents.

Colorado resident vs. nonresident seller: a side-by-side

Step by step: a Colorado exchange from listing to tax return

Here's the order I'd follow for a sale of Colorado property. Your CPA, attorney and intermediary will tailor it.

Step 1: Confirm the seller and residency

Check the deed for who owns the property. Then confirm where that owner is a resident for tax purposes on the closing date. Residency decides which withholding affirmation, if any, fits.

Step 2: Estimate federal and Colorado tax on a sale

Ask your CPA for your basis and depreciation. Then estimate the tax on a taxable sale, including the 4.4% Colorado layer. That's the size of what you're deferring.

Step 3: Hire an intermediary before closing

The intermediary must be engaged before the sale closes. You can't receive the proceeds yourself, even for a day.

Step 4: Talk to the title company about DR 1083 early

Tell the title company it's an exchange. If you're a nonresident, ask whether they'll need an affirmation, and review affirmation five with your CPA before you sign it. Settle this weeks before closing, not at the table.

Step 5: Close and note your dates

The day the deed transfers is day 0. Mark day 45 for identification and day 180 for closing, and compare day 180 with your return due date.

Step 6: Identify in writing within 45 days

Send your signed identification to the intermediary. Consider naming a backup. A DST interest is one kind of backup some investors use.

Step 7: Close on the replacement property

Close within 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first. Match or exceed the value and reinvest all the cash to defer the full gain.

Step 8: File federal and Colorado returns

The exchange goes on IRS Form 8824, attached to your federal return for the sale year. Your Colorado return picks up whatever federal taxable income results. If anything was withheld under DR 1079, claim it as a credit on your Colorado return.

Where do DSTs fit for Colorado owners?

With a Delaware Statutory Trust, or DST, a sponsor buys a property such as an apartment community or a warehouse and places it in a trust. Investors then purchase fractional beneficial interests, and the sponsor operates the property for all of them. My main DST guide covers the structure, the costs and the risks.

The IRS laid out how a DST can work in an exchange in Revenue Ruling 2004-86: "A taxpayer may exchange real property for an interest in the Delaware statutory trust described above without recognition of gain or loss under § 1031, if the other requirements of § 1031 are satisfied." In plain words, a DST interest can qualify as replacement property if everything else in the exchange is done right.

Why Colorado sellers consider them

• Owners in the mountains or on the Front Range, the cities along the east side of the Rockies such as Denver and Fort Collins, who are done managing. A DST removes landlord work. The sponsor handles tenants, repairs and financing.
• A way to meet the 45-day deadline. DST properties have already been bought by the sponsor. Once paperwork, funding and approvals are complete, closing can often take two to three business days.
• Spreading out. One Colorado building is one local economy. DST interests can be split across properties in several states and property types.
• Fitting the numbers. DST interests can be bought in set dollar amounts, which helps you reinvest all your cash and replace your debt.

The trade-offs

Every one of these matters:

• Liquidity. DST interests are hard to sell before the trust sells the property. In its Regulation D bulletin, the SEC tells buyers of restricted securities to plan on holding them with no set end date: "you should be prepared to hold the securities indefinitely."
• Control. You can't vote to sell, refinance or improve the property.
• Possible loss. You can lose part or all of your investment.
• Distributions. Distributions are not guaranteed and can drop or stop.
• Costs. Sponsor fees and offering costs come out of returns.
• Who can invest. Most DSTs are limited to accredited investors. Per the SEC's accredited investor bulletin, you can meet the income test by earning over $200,000 in each of the last two years, or over $300,000 counting a spouse's or spousal equivalent's income with yours, if you reasonably expect to reach that level again this year. You can also qualify with net worth over $1 million, not counting your home, or through a Series 7, 65 or 82 license that's in good standing.

Colorado tax on a DST's income

A DST passes its rental income and expenses through to investors. If you're a Colorado resident, your share is part of your income wherever the DST's property sits. If the property is in another state, that state may expect a nonresident return, and the Colorado credit for taxes paid to other states may come into play. Ask your CPA before you buy, not at tax time.

How working with me works

I founded Baker 1031 Investments, and you can read my background in acquisitions, management and development. Working together starts with an introductory call. After that, we look at opportunities side by side, and I'm open about why each one made my list, what draws me to it and what makes me cautious. If you'd like a preview, browse what's open for investment now.

Mistakes to avoid in a Colorado exchange

1. Forgetting the Colorado layer. Colorado tax at 4.4% applies to gain in federal taxable income. A failed exchange brings it due along with the federal tax.
2. Signing affirmation five without advice. It's signed under penalty of perjury. If boot is likely or the exchange may not close, talk with your CPA first.
3. Letting 2% withholding shrink your exchange. Money withheld at closing doesn't reach your intermediary. If you don't add cash, it can leave you with taxable boot.
4. Assuming a state capital gain break exists. The 2025 subtraction described by the Department of Revenue is for farmers selling Colorado agricultural land, capped at $100,000.
5. Skipping estimated payments on boot. If boot pushes your Colorado liability above $1,000, estimated payments may be due.
6. Ignoring the other state. If you buy replacement property outside Colorado, that state may tax you when you sell. Check its rules before you identify the property.
7. Losing track of a California chain. If any earlier exchange started with California property, FTB 3840 is still due every year.
8. Mismatched paperwork. The TD-1000, the closing statement and your exchange documents should tell the same story about price and terms.
9. Waiting until day 40 to look. Mountain and resort properties can take time to inspect and finance. Start looking before your sale closes.
10. Buying a DST without reading the PPM. The private placement memorandum, or PPM, is the offering document. Read the risks, fees, debt terms and exit plan before you identify the interest.

What my data shows

Every DST my team and I follow goes into a set of detailed offering records. As of October 2026, my offering records include 76 DST offerings from 38 sponsors. The figures below summarize that group, and none of them predicts how an offering will do.

Where the properties are

For a page about one state, location is the natural place to start. In my offering records as of October 2026, locations span 33 states; the most common are Florida (14), Texas (13), North Carolina (8), Georgia (7).

Colorado isn't one of the four states named in that line. For a Colorado seller, that has a practical meaning. A DST is often a way to own property outside Colorado. That can help spread out your real estate, and it also means the tax rules of the property's state may apply to you. Factor in those other-state filings when you compare options.

What else the records show

Projected distribution rates are projections from sponsors' documents. They are not guaranteed, and actual distributions can be lower or stop.

The leverage line matters for the boot section above. If your Colorado sale paid off a loan, you need to replace that debt or add cash. Some offerings carry debt and some don't, so the mix you pick affects whether you end up with debt boot.

Frequently asked questions

Does Colorado recognize 1031 exchanges?

Yes, in effect. Colorado income tax starts from federal taxable income, so a gain deferred under Section 1031 generally isn't taxed by Colorado either. There's no separate Colorado exchange election.

What is Colorado's tax rate on a real estate gain?

Colorado taxes the gain as income at its flat rate. The Department of Revenue's 2025 guide says the rate is 4.4%. Check the current year's booklet for the rate on a 2026 sale.

Will Colorado withhold tax if I'm a nonresident selling property there?

If the price is over $100,000, the closing agent generally withholds the lesser of 2% of the sales price or the net proceeds. You can avoid it by signing an applicable affirmation on Form DR 1083. Any amount withheld is credited on your Colorado return.

Is there a Colorado form for a 1031 exchange?

There's no Colorado form just for exchanges. You report the exchange on federal Form 8824, and Colorado picks up the result from federal taxable income. Nonresident sellers deal with DR 1083 at closing.

Can I sell Colorado property and buy in another state?

Yes. State lines don't matter for like-kind status, so a Denver rental can be traded for investment property in Ohio or Georgia. Remember that the new state may tax you when you later sell there.

Do I owe Colorado tax on boot?

Yes. Boot that's taxable on your federal return flows into Colorado taxable income at the state rate. If it pushes your expected Colorado tax over $1,000, consider estimated payments.

Does Colorado have a capital gains exclusion for rental property?

The Department of Revenue's 2025 guide describes a capital gain subtraction only for farmers selling Colorado agricultural land, limited to $100,000. Owners of rentals or commercial buildings shouldn't count on a state exclusion.

Can a DST interest be replacement property for a Colorado sale?

It can qualify, as long as the exchange satisfies the federal requirements. Before you choose one, weigh the downsides: you usually must be accredited, you may not be able to sell for years, payouts are not guaranteed, and you could lose principal.

What is the TD-1000 in a Colorado closing?

It's the Real Property Transfer Declaration that goes with deeds subject to the state documentary fee. If it isn't filed after the assessor's notice, the penalty is $25 or 0.025% of the sale price, whichever is greater. The title company usually prepares it.

If I move out of Colorado, does Colorado still tax my deferred gain?

It depends on your facts, so ask your CPA. Colorado's withholding form ties a nonresident's tax to gain included in federal taxable income from Colorado real estate. How the deferred gain is sourced when you sell the replacement property is the key question.

Before you act

I'm not a tax professional or attorney, and nothing here is tax, legal or investment advice. Colorado forms and rates can change from one year to the next, so ask your CPA, an attorney and your intermediary to review your exchange plan and any DR 1083 affirmation before closing. A DST interest is offered only through its private placement memorandum to investors who meet the offering's standards. Expect to hold it for years, know that distributions are not guaranteed, and accept that you can lose your entire investment.

Sources

• Colorado Department of Revenue, 2025 Individual Income Tax Filing Guide (Book 104)
• Colorado Department of Revenue, Form DR 1083, Information with Respect to a Conveyance of a Colorado Real Property Interest
• Colorado Department of Revenue, Form DR 1079 (2026), remittance of tax withheld on Colorado real property transfers
• Colorado Department of Regulatory Agencies, advisory on the Real Property Transfer Declaration (TD-1000)
• California Franchise Tax Board, 2025 Instructions for Form FTB 3840
• 26 U.S.C. § 1031, Exchange of real property held for productive use or investment (Cornell LII)
• 26 U.S.C. § 1, Tax imposed, including capital gains rates in § 1(h) (Cornell LII)
• 26 U.S.C. § 1411, Net investment income tax (Cornell LII)
• IRS Revenue Procedure 2025-32, 2026 inflation adjustments
• IRS, About Form 8824, Like-Kind Exchanges
• IRS Revenue Ruling 2004-86
• Investor.gov, Private Placements under Regulation D
• Investor.gov, Updated Investor Bulletin: Accredited Investors