The state of Colorado charges non-residents 2% of the sale price when they sell their vacation home or investment property. Believe it or not, it’s not a penalty for those unlucky people that don’t live in Colorado, it’s actually an incentive for them. If you are a non-resident you can avoid payment of the Colorado 2% withholding but only for limited reasons.
No matter where you live, the state of Colorado expects you to pay state taxes on any money you make here. That can be a hard task for the state to enforce but when it comes to property they have come up with a solution. If you don’t live in Colorado and sell your Colorado property, the company handling the closing is required to collect 2% of the sales price for the state of Colorado. 2% withholding can be a significant amount of money and Colorado knows it. The money they collect needs to be enough money to motivate the seller to file a Colorado tax return. When a tax return is filed, if 2% was too much to collect, a refund will be processed.
Taxes aren’t always due when a property is sold. For example, if there is no gain, no taxes are due. The state knows that and does give you a limited choice of reasons why the 2% should not be collected. If one of those reasons fits your situation you don’t have to have it withheld.
Typically the additional Colorado 2% withholding is not a big deal to out of state sellers. They know it will all work out come tax time. However, when that 2% fee is a surprise, it can wind up being a big deal.