When you sell an investment property for more than you paid, the profit is considered a capital gain. For investors in Colorado and across the U.S., understanding how capital gains taxes work is essential for evaluating your return on investment and planning your next move.
Whether you’re selling a long-term rental, a fix-and-flip, or a vacation home in the mountains, knowing the rules can help you keep more of your earnings.
Types of Capital Gains: Short-Term vs. Long-Term
Capital gains fall into two main categories—and the difference determines your tax rate.
1. Short-Term Capital Gains
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Applies to properties held less than 12 months
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Taxed as ordinary income
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Usually results in higher taxes for investors
2. Long-Term Capital Gains
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Applies to properties held 12+ months
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Taxed at long-term capital gains rates, often lower than income tax
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Encourages longer holding strategies
Investor takeaway: Holding a property for at least a year typically results in lower taxes on your gains.
How to Calculate Capital Gains on Real Estate
Calculating your capital gains isn’t as simple as subtracting your purchase price from your selling price. Several adjustments can impact your taxable amount.
Capital Gain Formula
Selling Price
– Selling Costs
– Adjusted Basis
= Capital Gain
Adjusted Basis Includes:
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Original purchase price
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Capital improvements (not repairs)
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Closing costs
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Depreciation taken over ownership
Why this matters: Your adjusted basis determines the amount the IRS will tax.
Understanding Depreciation Recapture
If you claimed depreciation on your investment property (common for rentals), the IRS requires “depreciation recapture” when you sell.
Key Points
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Depreciation recapture is taxed at up to 25%
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Applies only to the amount you depreciated
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Happens regardless of how long you owned the property
Tip: Plan ahead—recapture surprises many first-time investors during sale.
Strategies Investors Use to Reduce Capital Gains Taxes
Real estate offers several legal tax strategies that can significantly reduce or defer capital gains.
1. 1031 Exchange (Tax-Deferred Exchange)
This is one of the most powerful tools available.
How it works:
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Sell one investment property
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Reinvest the proceeds into another “like-kind” investment
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Defer capital gains and depreciation recapture
Benefits:
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Allows continuous portfolio growth
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Avoids immediate tax hit
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Popular among Colorado investors upgrading into larger rentals or multi-unit properties
2. Opportunity Zone Investments
Investing in designated Opportunity Zones can:
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Defer capital gains
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Reduce the taxable amount
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Potentially eliminate taxes on new gains
These zones are typically in developing or revitalizing areas.
3. Using Capital Improvements to Adjust Basis
Capital improvements (not routine repairs) can be added to your basis.
Examples include:
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New roof
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Major HVAC upgrades
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Kitchen remodels
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Basement finishing
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Adding livable square footage
Higher basis = lower taxable gain.
4. Offset Gains with Capital Losses
If you sold stocks, investments, or other assets at a loss, you can apply those losses to reduce your capital gain from real estate.
5. Convert the Property to a Primary Residence (Long-Term Strategy)
For investors with flexible plans:
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Live in the property for 2 out of 5 years
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You may qualify for the Section 121 exclusion
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Excludes up to $250,000 (single) or $500,000 (married) of capital gains
Note: This strategy has limitations when depreciation was taken while it was a rental.
How Colorado Investors Approach Capital Gains
In Denver, Douglas, and Jefferson counties—along with mountain markets like Summit, Routt, and Eagle—investors consider capital gains early in their exit strategy.
Common investor approaches include:
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Holding long-term to benefit from appreciation
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Using depreciation benefits each year
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Leveraging 1031 exchanges to scale portfolios
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Strategically timing repairs and capital improvements before sale
The tax impact can significantly affect net proceeds, so planning ahead is key.
When to Talk to a Tax Professional
While understanding the basics is important, every property and financial situation is different.
Always consult with:
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A CPA specializing in real estate
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A 1031 exchange accommodator
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A financial advisor familiar with investment property portfolios
This ensures you choose the right strategy for your goals.
Final Thoughts: Maximize Your Return by Understanding Capital Gains Early
Capital gains taxes are a natural part of real estate investing, but with the right strategy, you can significantly reduce or defer what you owe. Whether you’re selling your first rental or repositioning a portfolio, a thoughtful plan can protect your profits and position you for long-term success.
The Living Colorado Team can help you evaluate timing, ROI, market conditions, and exit strategies as part of your investment journey.
👉 Plan your next move with the Living Colorado Team:
https://LivingColoradoTeam.com