Because of an amendment to the state constitution, Colorado's real estate transfer tax system is frozen in time, though the state has been able to find loopholes in recent years. In this post, we'll cover every aspect of Colorado's transfer tax system, and answer the most common questions on the topic.
Real estate transfer taxes vary from state to state and even from county to county, so it's always best to consult a local, experienced real estate agent with any questions you might have about real estate transfer taxes. They'll have dealt with the issue many times before, and can guide you through the complicated assessment and payment process with confidence.
Let's break down Colorado's real estate transfer taxes and answer some of the most frequently asked questions about the Centennial State's real estate tax policy.
What are real estate transfer taxes?
A real estate transfer tax is a tax that's charged when the title of a property is transferred from one owner to another. Depending on where you are, you could be liable for transfer tax at the state, county and city levels simultaneously. It's even possible to be liable for federal transfer taxes if you acquire a property as a gift, or through an inheritance.
Transfer taxes are separate from property taxes, recording fees, and mortgage recording taxes, and are sometimes called a “stamp tax” or “deed tax,” depending on the state. The amount of the transfer tax is based on the property's value, so the more valuable the property being transferred, the higher the amount of transfer tax due. Whether the buyer or the seller is responsible for paying the real estate transfer tax depends on local laws.
How much are real estate transfer taxes in Colorado?
Colorado real estate transfer tax laws vary throughout the state, so buyers should consult a local real estate professional for specific information.
Real estate transfer taxes are an especially tricky issue in Colorado, as the state passed a constitutional amendment in 1992 freezing all real estate transfer taxes and prohibiting any new transfer taxes being imposed. Why is this complicated? Well, to get around the amendment, lawmakers later came up with a statewide “documentary fee” of 0.01% that's paid by the buyer on any property sale above $500. In 2018, this fee was increased to 0.02% per $100 of property value. This tax is paid to the county clerk and recorder in the county where the property changes hands. While it's not called a real estate transfer tax, in essence that's exactly what it is.
The median home value in Colorado is $427,659, so a buyer would owe a documentary fee of $85.53 if they purchased this average home.
Who pays transfer taxes in Colorado: the buyer or the seller?
Typically, the buyer and seller split the transfer taxes. But it's not uncommon for the two parties in a sale to work out an alternative arrangement.
Keep in mind that the 0.02% “documentary fee,” which is a real estate transfer tax in all but name, is paid by the buyer. And depending on where you buy, you may owe a real estate transfer fee to a homeowner association; this, however, is a private fee, not a government tax. If you're the home buyer, expect to pay these fees unless you discuss otherwise with the seller.
Are Colorado transfer taxes deductible?
No. The buyer is not allowed to deduct transfer taxes and documentary fees paid on the sale of a personal home. The buyer includes these expenses in the cost basis of the property.
The seller can't deduct these payments either. They can, however, classify any real estate transfer tax or documentary fees paid as an expense, which will reduce the overall taxable amount earned from the property sale.
The same applies to any real estate transfer fee paid to a homeowner's association; this can't be deducted, as it's a private fee, and not a tax.
One possible exception to this rule is that if the property being purchased is work-related, i.e. is going to be used as a home office, or is a rental or investment property, then the real estate transfer tax could be written off as a work expense. As always, consult with a tax professional for definitive answers.
How to Save on Closing Costs in Colorado
There are a variety of ways that you could save on closing costs in Colorado. If you bought your home in cash, you could dramatically reduce your closing costs, as many of the fees that make up closing costs are related to financing. Or if you're in a strong negotiating position, you might convince the seller to take on more than half of the closing costs.
One of the best and easiest ways to save on closing costs is to work with a Clever Partner Agent. Clever Partner Agents are top performers in their markets and bring proven track records and valuable experience to the table.
They can maximize your leverage when it comes time to negotiate the closing costs, and since they offer a full service agent experience for a low, flat fee, the thousands of dollars you could potentially save on commissions can go towards your closing costs. If you're ready to start your home buying journey, contact us today for a free, no-obligation consultation!
Top FAQs About Colorado Real Estate Transfer Taxes
What states have transfer taxes?
All states, plus the District of Columbia, have real estate transfer taxes, with the exception of these 13 states: Alaska, Idaho, Indiana, Louisiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Oregon, Texas, Utah, and Wyoming.
Do I need a lawyer to transfer a deed?
While it's recommended that you use a lawyer to transfer a deed, it's not legally required.
What are the risks of transferring a deed without a lawyer? When you transfer a deed between two parties, the information on the deed must be completely accurate, or the parties could be exposed to significant legal liability. Information like names and property lines can become outdated, and must be researched and confirmed. A lawyer is experienced with this process, and can make sure the deed is absolutely accurate.
If you're transferring a deed without a lawyer, request a certified copy from the county clerk's office, and review all information. Once you're sure everything is accurate, use a blank deed form to draw up the new deed, filling in the name of the grantor and grantee (buyer and seller), and the property's specific legal description. Take this filled-out deed to the county recorder's office, where the county clerk can act as a notary public and witness the signatures of both parties. Once both buyer and seller have signed the deed, it becomes a binding official document.
How much are closing costs?
Home buyers can expect to pay 2% to 5% of their home's purchase price in closing fees. So for an average American home with a median value of $295,300, closing costs will be between $5,903 and $14,765.
Can you negotiate closing costs?
Yes. Everything in a real estate transaction is negotiable, and it's possible to convince the seller to take on more or all of the closing costs, especially if they're a highly motivated seller.
Buyers can also reduce portions of the closing costs by looking on their loan estimate form, where they'll see a breakdown of the various fees that make up the total closing costs. By shopping around among vendors, it's possible to reduce the total closing costs by finding cheaper alternatives for charges like surveying, pest inspection, and settlement agent.
How can I avoid closing costs?
There are many ways to avoid closing costs. One of the easiest is to pay cash for your home, since a large portion of closing costs are associated with the mortgage. If you can't buy your home outright, you could negotiate with the seller to have them take on the closing costs, though this will require significant leverage or persuasiveness on your part.
Another common way to avoid closing costs is to wrap them into the mortgage, if you're short on funds when it comes time to close. This simply means you're adding the closing costs to the amount you're borrowing to buy your home. Keep in mind, however, that although this is convenient in the short term, you'll be paying interest on the closing costs, so you'll end up paying more in the long term.