Tax Laws for Rental Property in Colorado

Laws in Colorado State which pertain to rental property are the same as the federal tax code regulations.  Colorado rental property owners must attach their federal return to their state return to file.  The reason for this is that it helps to eliminate confusion that once existed between federal and state law differences.  In the federal tax return, schedule E must be completed which is the rental property’s income and expense deductions statement.  Any losses or gains from the property are then recorded and reported on the federal tax return’s schedule D section.

Rental Property Income and Expenses

Expenses are considered all costs of managing and maintenance of the real property.  This includes any check or cash payment that was made for any cost such as utilities, small repair, gardening service, and upkeep and maintenance. When the property owner is completing their income taxes at the end of the year, they will record the rental property expenses on schedule E of their federal tax return.  Unless the property owner’s business utilizes the accrual method of accounting, property owners are on a “cash basis”.  What this means is that all expenses that are recorded for the year in which the tax return is being filed should have actually been paid. Rental property income also follows the same rule and should be recorded separately and included in the tax return for the year in which the income was received.

Capital Improvements

Capital improvements are considered as “major” improvements on rental property like a new bathroom addition or a kitchen remodel.  When capital improvements are performed on a rental property the improvement must be depreciated over a timeframe of 27.5 years according to the federal tax code.  A straight line depreciation is used which means that the costs of the improvement are added and an even amount is deducted yearly for 27.5 years.  The cost of the capital improvements less the amount of depreciation that is being claimed on the property is referred to as the net capital expenditures.  The expenditures are added to the rental property cost.  For example, if the property owner spent $15K on a bathroom remodel and the property’s cost was $200K then the cost basis for loss or gain on the property would be $215K.

Rental Property Sale

When a property owner sells their rental property then the adjusted basis of the rental should be deducted from the “net sale price”, which is the gross sale price of the property.  Included in the net sale price is a deduction for any expenses for the transaction of the sale such as the realtor’s commission fees and expenses for escrow.   For instance, if a rental property sells for $300K and the property’s closing costs were $20K, then the net sale price of the property would be $280K.  If the rental property’s adjusted basis was $100K, the gain the property owner would report on their federal income tax return would be $180K.

Considerations

When a property owner files their tax return the tax treatment of the property may involve many schedules which include the income and expenses schedule, depreciation schedule and capital gains schedules.  It is strongly suggested that all rental property owners consult with a tax professional when they file their annual tax return.  All receipts that are for repairs, maintenance, and improvements of the rental property must be kept in order to support any deductions that apply to the property.  Also maintain copies of all cancelled checks.

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