Do you owe capital gains on a home sale in Denver?
Only on the part of your gain above the federal exclusion: up to $250,000 for a single filer or $500,000 for a married couple filing jointly, if you owned and lived in the home for at least two of the five years before the sale. Gain above that is taxed by the IRS and by Colorado. The year your closing lands in decides which tax year the gain belongs to.
Capital gains on home sale proceeds are one of the first things long time Denver owners ask about when a house bought decades ago has gained a great deal of value. The rules are federal, Colorado follows them, and the number that matters most is not the sale price but your adjusted basis.
This is general information, not tax or legal advice. We are real estate agents, not tax professionals, and every seller’s situation is different. Please confirm your own numbers with a CPA or tax advisor before you list.
How Much of Your Gain Is Excluded?
According to IRS Publication 523, Selling Your Home (the edition for 2025 returns), single filers and married people filing separately can exclude up to $250,000 of gain on the sale of a main home, and married couples filing jointly can exclude up to $500,000. To get the full exclusion you have to pass the eligibility test, which has three parts:
- Ownership: you owned the home for at least 24 months out of the five years before the sale. On a joint return, only one spouse has to meet this.
- Residence: you lived in the home as your residence for a total of 24 months in that same five year window. On a joint return, each spouse has to meet this individually for the full $500,000.
- Look back: you can take the exclusion only once in any two year period.
The 24 months do not have to be continuous, and the ownership and residence periods do not have to be the same months. Publication 523 also disqualifies a home acquired through a like kind exchange within the past five years.
If you fall short of the two years, you may still qualify for a partial exclusion when the main reason for the sale was a change in workplace location, a health issue or an unforeseeable event. The IRS lists examples such as a work move of at least 50 miles, divorce, death and job loss. Whether your reason counts is a question for your tax advisor.
Source: Internal Revenue Service, Publication 523 (2025), Selling Your Home. These are federal tax rules, not market data, and not necessarily how they apply to your own sale; this is not tax advice from Sara Garza, Donna Ryan or LIV Sotheby’s International Realty.
How Is Your Cost Basis Figured?
Your gain is not the sale price minus what you paid. Publication 523 builds it in steps:
| Step | What goes in |
|---|---|
| 1. Amount realized | The selling price minus your selling expenses, such as commissions and the seller’s closing costs |
| 2. Adjusted basis | What you paid, plus many settlement costs from your purchase, plus capital improvements, minus certain credits and subsidies |
| 3. Gain | Amount realized minus adjusted basis |
| 4. Taxable gain | Gain minus the exclusion you qualify for |
Basis starts with your purchase price. The IRS lets you add many settlement costs from the purchase, including abstract fees, legal fees, recording fees, survey fees, transfer taxes and owner’s title insurance. It does not let you add fire and casualty insurance premiums, rent or utilities paid before closing, or the costs of getting a mortgage, such as points and loan origination fees.
For a Denver owner who bought in Washington Park or Hilltop many years ago, the purchase price may be far below what the home could sell for now, so the improvements you can document carry most of the weight. Publication 523 also says that energy credits and subsidies you received for an improvement must be subtracted from basis, so a solar or heat pump project that earned a credit adds less than its full cost.
Which Projects Raise Your Basis and Which Do Not?
The IRS draws the line between improvements and repairs. An improvement adds to the value of your home, prolongs its useful life or adapts it to new uses. A repair keeps the home in good condition and generally does not add to basis. Repair type work can count when it is part of a larger remodel or restoration of the home.
| Usually raises basis | Usually does not |
|---|---|
| An addition, such as a bedroom, a deck or a pool | Painting a room or the exterior on its own |
| A new roof or new siding | Fixing a leak or patching a roof |
| Central air or a new heating system | Routine servicing of the furnace or air conditioner |
| A security system | Replacing a broken window pane |
| A full kitchen or bath remodel, including the painting and repairs done as part of it | Fire and casualty insurance premiums |
| Purchase settlement costs such as title insurance, recording fees and transfer taxes | Mortgage points and loan origination fees |
One caution: the label on an invoice does not decide the question. A contractor bill that says “repair” may still be part of a larger remodel, and a bill that says “upgrade” may still be maintenance.
What Does Colorado Add?
Colorado does not have a separate capital gains tax. Its individual return starts from your federal taxable income: the Colorado Department of Revenue 2025 income tax booklet tells filers to enter federal taxable income on line 1 of Form DR 0104. Gain you exclude on your federal return therefore stays out of Colorado income too, and gain above the exclusion is taxed at the state’s flat rate, which that booklet gives as 4.4%.
The rate can change from one year to the next, so check the booklet for the year your sale closes. If you have moved out of Colorado before selling, the booklet explains that tax for part year residents and nonresidents is prorated to income from Colorado sources, which includes the sale of a Colorado home, and the booklet also covers tax withheld on Colorado real estate sales by nonresidents.
Source: Colorado Department of Revenue, 2025 Individual Income Tax Booklet. These are state tax rules, not market data, and not necessarily how they apply to your own sale; this is not tax advice from Sara Garza, Donna Ryan or LIV Sotheby’s International Realty.
Which Federal Rates Apply to the Gain Above the Exclusion?
A home you have owned more than one year produces a long term gain. According to IRS Topic 409, Capital Gains and Losses, long term gains are taxed at 0%, 15% or 20% depending on taxable income. For tax years beginning in 2025, the 20% rate starts above $600,050 of taxable income for married couples filing jointly and above $533,400 for single filers. A large gain can push part of itself into the higher rate, because the gain itself counts toward taxable income.
On top of that, the IRS questions and answers on the Net Investment Income Tax explain that a 3.8% tax can apply once modified adjusted gross income passes $250,000 for a married couple filing jointly or $200,000 for a single filer. Those thresholds are not indexed for inflation. The IRS says the tax does not apply to gain you exclude under the home sale rules, but gain above the exclusion counts as net investment income.
If you ever claimed depreciation for a home office or for renting part of the home, Publication 523 says the exclusion does not cover gain equal to that depreciation, which is reported on Form 4797. Gain tied to periods after 2008 when the home was not your main residence, such as years it was rented out before you moved in, is generally not excludable either, with some exceptions.
Source: Internal Revenue Service, Topic 409, page updated September 2026 and IRS Net Investment Income Tax questions and answers. These are federal tax rules, not market data, and not necessarily how they apply to your own sale; this is not tax advice from Sara Garza, Donna Ryan or LIV Sotheby’s International Realty.
Does a December or January Closing Change Your Tax Bill?
The gain belongs to the tax year of the sale. Publication 523 points to box 1 of the real estate proceeds form the closing agent files with the IRS for the date of sale, and for most sellers that is the closing date. A closing on December 30, 2026 lands on your 2026 return, filed in 2027. A closing on January 4, 2027 lands on your 2027 return, filed in 2028, which also moves when any estimated tax on the gain is due.
Which year is better depends on your own income picture. A few questions to bring to your CPA in the fall:
- Will your other income be lower in one of the two years? Retirement, a sabbatical or a business sale can change which federal rate and whether the Net Investment Income Tax applies.
- Are you close to the two year marks? The ownership and residence tests are measured over the five years ending on the date of sale, and the once every two years rule is measured from your last excluded sale. A few weeks can decide whether you qualify.
- Do you have losses or other gains that year? Capital losses from investments can offset a home sale gain in the same year.
- Is a move or a purchase tied to the date? Tax timing rarely justifies losing the right buyer, and the market does not wait for a calendar.
Closing dates are set in the contract, so the time to raise this is before you list, not after an offer arrives. Our guide to selling a house in Denver this winter covers pricing and preparation in the colder months.
What Records Should You Gather Before Listing?
Long time owners often find the paperwork is the hardest part. We usually advise sellers to start this file before the photographer arrives, because a missing invoice cannot be added to basis after the fact. Look for:
- Your purchase closing statement (the settlement statement or closing disclosure), which shows the price and the settlement costs you can add to basis.
- Contracts, invoices, permits and proof of payment for every addition, remodel, roof, window, mechanical system and landscape project.
- Records of any energy credits, rebates or subsidies tied to an improvement.
- Any years you rented the home or claimed a home office, with the depreciation you took.
- Dates you lived in the home, if you moved out before selling, so you can show the 24 months of residence.
- If you inherited the home or received it in a divorce, the documents that set your starting basis, which follow different rules your advisor should review.
Frequently Asked Questions
Do I have to report the sale if all of my gain is excluded?
The IRS Topic 701 on selling your home says you must report the sale if you received the real estate proceeds form from your closing, even when the gain is fully excludable, and you must report it whenever you cannot exclude all of the gain. Reporting uses Form 8949 and Schedule D.
We are married but only one of us lived in the house for two years. Do we get the full exclusion?
Not the full amount. Publication 523 says only one spouse needs to meet the ownership test, but each spouse must meet the residence test individually for the full joint exclusion. Ask your tax advisor how the smaller exclusion is figured in your case.
Does Colorado tax the gain I exclude on my federal return?
No. Colorado’s return starts from federal taxable income, so gain excluded on the federal return never reaches the Colorado return. Gain above the exclusion is taxed at Colorado’s flat individual rate for the year of the sale.
Can I add the cost of a kitchen remodel from many years ago to my basis?
Generally yes, if it was a capital improvement that is still part of the home and you can document it. Contracts, invoices, permits and proof of payment are the strongest records, which is why we suggest gathering them well before you list.
Plan the Sale and the Taxes Together
For a Denver home with a large gain, the list price, the closing date and the tax return are connected. A good plan starts with a realistic value, a clear basis figure from your records and a conversation with your CPA about which tax year works better. If you would like a current, private estimate of what your home could sell for, request a home value report, or contact us for a private consultation about timing your sale. You can also read what goes into your Denver home’s value before we talk.