Colorado revised its state tax code in 2021, and many of the changes will impact investors. Additionally, the federal government has adjusted various tax laws in response to inflation and the pandemic, so the tax landscape may be quite different from a year ago. Read on to learn how the changes affect Colorado investors, business owners, landlords and other taxpayers.
Homeowners will get a reduction in their property taxes, small business owners will get a tax cut
Itemized deductions are capped for high earners and business owners
For taxes due in 2022, households earning more than $400,000 a year can only claim $60,000 in itemized deductions. Additionally, business owners who earn more than $500,000 in individual income or $1 million as a household will not be eligible for the “pass through” deduction, which allows individuals to deduct business income. business of their personal taxes. The deduction was temporarily suspended in 2012, but this time it is permanent.
For Colorado owners, tax deductions for owners remain largely unchanged.
Capital gains will be subject to state taxes
Previously, Colorado residents who paid federal capital gains taxes were exempt from capital gains at the state level. Those days are over. There is a small class of farm property owners who will still be able to deduct capital gains, but most Colorado taxpayers will have to pay capital gains taxes on their investment income.
However, Coloradans can still access one of the most effective ways to protect their capital gains – the 1031 exchange. Using a 1031 exchange in Colorado, investors can defer the payment of capital gains by reinvesting the profits from the sale of a property in a similar property. The best part is that investors can use a 1031 exchange repeatedly, build their real estate portfolio, and defer capital gains indefinitely.
State property taxes will drop
Homeowners will benefit from a reduction in their property taxes in 2022 and 2023. Single-family homes will benefit from a reduction of approximately 3%, apartments will benefit from a reduction of 5% and agricultural and renewable energy properties will benefit a reduction of around 9%. %. Colorado has also expanded a property tax deferral program for homeowners whose taxes rise significantly.
This shift is likely a response to skyrocketing home values in Colorado. By 2025, a recent analysis estimates that the assessed value of residential properties across Colorado is expected to increase by nearly 40%, from $7.3 billion to $13.9 billion.
Under the current statewide property tax system, incomes would nearly double, which could put a strain on many homeowners and homebuyers, even with sweeteners, such as discounts for home buyers that make home ownership more affordable.
Small business owners will get a tax cut
Previously, business owners had to pay property tax on office items, such as equipment, furniture, or electronics. Under the old law, anything over $7,900 was taxable. However, recent changes have raised the threshold to $50,000, giving small businesses a big shot.
Coloradans Could Pay State Taxes With Cryptocurrency
In February, Governor Jared Polis announced at a crypto conference in Denver that the state plans to accept cryptocurrency as a method of paying taxes starting in 2022. This proposal comes after years of positioning of Colorado as a leader in the crypto economy.
However, financial experts warn that using cryptocurrency to pay state taxes could be complicated. If the crypto used to pay state taxes goes up in value, its disposal will trigger capital gains taxes, which means crypto holders could get slapped with another tax bill.
First shareholders, take note
In 2021, “meme stocks,” such as GameStop and AMC, have grown in popularity through social media, especially among Gen Z and millennial investors. Earnings on an investment held for less than a year is considered a short-term capital gain, which is taxed as ordinary income. For shares held for more than one year, profits are considered long-term capital gains, which are subject to tax rates of 0%, 15% or 20% depending on income.
Finally, for investors who bought high and took a loss, there is a silver lining. These investors can deduct up to $3,000 of losses from their regular income. If they lost more than that, they could carry it over to subsequent years.
Changes to Roth IRA accounts may be on the way
The “Build Back Better” bill that is currently before Congress contains a proposal that would end “stealth” Roth IRAs — a strategy that wealthy taxpayers use to avoid Roth IRA income restrictions. This new law would only affect taxpayers with incomes of $400,000 or more, and it wouldn’t go into effect for several years, meaning most people could still benefit from this financial hack.
Luke Babich is the co-founder of Smart real estate, a real estate education platform that helps buyers, sellers, and investors make smarter financial decisions. Luke is a licensed realtor in the state of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.