Capital Gains Tax and Real Estate: What Summit County Sellers Need to Know

This post is for educational purposes only and is not tax advice. Every seller's situation is different. Please consult a qualified CPA or tax advisor before making decisions based on this information.

If you're thinking about selling a home in Summit County — whether it's a primary residence, a short-term rental, or an investment property — one of the first questions you should be asking is: what am I going to owe in taxes on this sale?

Capital gains tax is one of the most misunderstood parts of a real estate transaction. Some sellers are surprised to learn they owe far less than they expected. Others are surprised to learn they owe far more. The difference almost always comes down to a few key factors: what type of property it is, how long you've owned it, how you've used it, and what your overall income picture looks like.

This post walks you through the fundamentals — in plain English — so you can have a more informed conversation with your CPA before you list.

 

What Is a Capital Gain?

A capital gain is the profit you make when you sell an asset for more than you paid for it. In real estate, your gain is calculated by taking your sale price and subtracting your adjusted cost basis — which is generally what you paid for the property, plus any capital improvements you made, plus certain closing costs from when you purchased it.

For example: if you bought a Summit County condo for $500,000, put $50,000 into renovations, and paid $10,000 in closing costs at purchase, your adjusted basis is $560,000. If you sell for $800,000, your capital gain is $240,000.

That's the number that gets taxed — not the full sale price. This distinction matters and is worth understanding clearly before you assume the worst. A good CPA can help you identify every legitimate addition to your basis, which can meaningfully reduce the gain.

 

Short-Term vs. Long-Term: The Rate Difference Is Significant

Not all capital gains are taxed the same way. The single biggest factor affecting your federal tax rate is how long you owned the property.

Short-term capital gains apply to properties sold within one year of purchase. These gains are taxed as ordinary income — meaning they're added to your regular income and taxed at your marginal federal rate, which can be as high as 37% depending on your income level.

Long-term capital gains apply to properties sold after more than one year of ownership. These are taxed at preferential federal rates — 0%, 15%, or 20% — depending on your total taxable income.

For 2026, the federal long-term capital gains brackets are:

• 0% — Single filers with taxable income up to $49,450; married filing jointly up to $98,900
• 15% — Single filers between $49,450 and $545,500; married filing jointly between $98,900 and $613,700
• 20% — Above those thresholds

For most Summit County sellers, the difference between selling at 11 months versus 13 months of ownership could be tens of thousands of dollars. If you're approaching that one-year mark, it's worth talking to your CPA about timing before you list. We can work with you on listing timing as well — that's exactly the kind of strategic conversation we have with sellers.

 

The Net Investment Income Tax — An Extra Layer for High Earners

There's an additional 3.8% federal surtax called the Net Investment Income Tax (NIIT) that applies to capital gains for higher-income sellers. For 2026, this kicks in for single filers with modified adjusted gross income above $200,000 and married couples above $250,000.

This means a high-income seller could face an effective federal rate of up to 23.8% on long-term capital gains (20% + 3.8% NIIT) — before state taxes are added. If you're in this territory, this is definitely a conversation to have with your CPA well before closing.

 

Colorado State Capital Gains Tax

Colorado taxes capital gains as regular income at the state's flat income tax rate of 4.4%. There are no preferential long-term rates at the state level — unlike the federal system, Colorado doesn't distinguish between short-term and long-term gains. Whether you held the property for six months or twenty years, the state takes 4.4% of the gain.

There is one notable Colorado-specific subtraction worth knowing: if you sell a qualifying Colorado-based asset that you've held for at least five years, you may be able to exclude up to $100,000 of that gain from Colorado state income. This requires filing Form DR 1316 and the asset must meet specific requirements — your CPA can tell you whether your property qualifies.

What this means in practice: on a significant Summit County real estate gain, you're looking at combined federal and state tax that could range anywhere from roughly 4.4% (if you're in the 0% federal bracket) all the way to 28% or more at higher income levels — before any exclusions or deferrals are applied. The exact number depends entirely on your individual situation, which is why the CPA conversation is non-negotiable.

 

The Primary Residence Exclusion — The Biggest Break Available to Sellers

If you're selling a home that has been your primary residence, the federal tax code offers a significant exclusion that can eliminate capital gains tax entirely — or dramatically reduce it.

Under IRS Section 121, you can exclude:

• Up to $250,000 in capital gains if you're a single filer
• Up to $500,000 if you're married filing jointly

To qualify, you must have owned and lived in the home as your primary residence for at least two of the five years immediately preceding the sale. The two years do not need to be consecutive.

Colorado honors this federal exclusion — meaning qualifying gains escape both federal and Colorado state tax entirely.

Example: A married couple bought a home in Silverthorne for $600,000, made $100,000 in improvements, and sold it for $1,300,000 after living there as their primary residence for four years. Their adjusted basis is $700,000. Their gain is $600,000. After the $500,000 exclusion, only $100,000 is taxable. That is a substantial difference from owing tax on the full $600,000 gain.

Important caveat for Summit County sellers: Many homes in this area are used as part-time primary residences alongside STR or vacation use. If your home has been used for short-term rental purposes during your ownership, the exclusion calculation gets more complicated and depreciation recapture may apply. This is a situation where CPA involvement early — not at closing — is essential.

 

Investment and STR Properties — No Exclusion Applies

If you're selling a property that has never been your primary residence — a pure investment property, a short-term rental, or a second home — the primary residence exclusion does not apply. The full capital gain is taxable.

There are two additional considerations specific to investment properties that sellers often don't anticipate:

Depreciation recapture. If you've been depreciating the property on your tax returns — as most STR and rental property owners do — the IRS will "recapture" that depreciation upon sale. Depreciation recapture is taxed at a maximum federal rate of 25%, separate from the capital gains rate on the remaining appreciation. This can add meaningfully to your tax bill and is something many sellers don't account for when estimating their net proceeds.

The full gain is taxable. On a Summit County STR or investment property that has appreciated significantly — which describes a large number of properties purchased in the last decade — the capital gains exposure can be substantial. Knowing your number before you list allows you to plan, price, and decide whether a 1031 exchange makes more sense than an outright sale.

 

The 1031 Exchange — How Real Estate Investors Defer Capital Gains

A 1031 exchange is one of the most powerful tools available to real estate investors and it is entirely legal. Named for Section 1031 of the Internal Revenue Code, it allows you to sell an investment property and defer paying capital gains tax — indefinitely — by reinvesting the proceeds into a "like-kind" replacement property.

Here's how it works at a high level:

You sell your investment property. Instead of receiving the proceeds directly, they are held by a qualified intermediary — a third party required by IRS rules to facilitate the exchange. You then have 45 days to identify potential replacement properties and 180 days to close on one of them. If you complete the exchange within those timelines, the capital gains tax is deferred to a future sale.

The deferral is not forgiveness — when you eventually sell the replacement property without doing another exchange, the deferred gain comes due. But many investors do successive 1031 exchanges throughout their lifetime, continuously deferring the tax and growing their portfolio. Some hold properties until death, at which point heirs receive a stepped-up basis and the deferred gain disappears entirely.

Key requirements to know:

The replacement property must be of equal or greater value. You must reinvest all of the net proceeds — any cash you receive ("boot") is taxable. The exchange must be completed through a qualified intermediary — you cannot touch the funds yourself. And the timelines are strict with no exceptions.

Colorado has no additional state-level requirements for 1031 exchanges beyond federal rules. A properly executed exchange defers both federal and Colorado state capital gains tax simultaneously.

If you own a Summit County STR or investment property and are considering selling, a 1031 exchange is a conversation worth having before you make any decisions — and ideally before you list the property. Once the sale closes without an exchange in place, the option is gone. We work with sellers navigating this decision regularly and are happy to connect you with qualified intermediaries and CPAs who specialize in this area.

 

A Practical Note on Timing

Because capital gains tax rates are tied to your total taxable income in the year of the sale, timing your sale strategically can sometimes make a meaningful difference. Selling in a year when your income is lower — due to retirement, a career transition, or other circumstances — may move you into a lower federal bracket and reduce your effective rate.

This is the kind of planning that rewards starting the conversation early. If you're thinking about selling a Summit County property in the next one to three years, looping in a CPA now — not the month before you list — gives you the most options.

 

Frequently Asked Questions

Do I owe capital gains tax if I sell my Summit County home? It depends on how long you've owned it, whether it was your primary residence, and what your overall income looks like. If it was your primary residence and you meet the two-year ownership and use test, you may owe little or nothing. If it's an investment or STR property, capital gains tax will almost certainly apply. Talk to a CPA with your specific numbers.

What is the capital gains tax rate in Colorado? Colorado taxes capital gains as regular income at a flat rate of 4.4% — on top of applicable federal rates. There is no preferential long-term rate at the state level.

What is the primary residence exclusion? Single filers can exclude up to $250,000 of capital gains; married couples filing jointly can exclude up to $500,000 — provided you've owned and lived in the home as your primary residence for at least two of the five years before the sale.

What is a 1031 exchange? A tax-deferred exchange that allows investment property owners to sell and reinvest in a like-kind replacement property, deferring capital gains tax indefinitely. Strict timelines and rules apply. Always work with a qualified intermediary and CPA.

What is depreciation recapture? If you've depreciated a rental or STR property on your taxes, the IRS requires that depreciation to be "recaptured" and taxed upon sale at up to 25% federally. It's a significant and often overlooked element of the tax picture on investment properties.

Should I sell my STR before or after a 1031 exchange? That's exactly the kind of question your CPA and your real estate agent should be answering together before you make any moves. The order of operations matters — and once you close without an exchange in place, the option is gone.

 

The Bottom Line

Capital gains tax is one of the most significant financial considerations in any real estate sale — and one of the most misunderstood. The good news is that with the right team around you — a knowledgeable CPA, a qualified intermediary if a 1031 is on the table, and an agent who understands the Summit County market — you can make decisions that protect more of what you've built.

We are not tax advisors and nothing in this post should be taken as tax advice. What we are is a team that takes the financial complexity of Summit County real estate seriously — and that includes making sure our sellers understand the full picture before they sign anything.

If you're thinking about selling and want to talk through the process — including how to build the right team around your transaction — we'd love to have that conversation.