Income Tax Topics: Colorado Capital Gain Subtraction 

Qualifying  taxpayers  can  claim  a  subtraction  on  their     Qualified taxpayers 
Colorado  income  tax  returns  for  certain  qualifying 
capital gains included in their federal taxable income.          For tax years commencing prior to January 1, 2022, the 
The subtraction is allowed only for capital gains earned         Colorado capital gain subtraction is allowed to eligible 
from  qualifying  property  the  taxpayer  acquired  on  or      individuals,  estates,  trusts,  and  corporations.  For  tax 
after  May  9,  1994  and  owned  for  at  least  five           years  commencing  on  or  after  January  1,  2022,  the 
uninterrupted years prior to the date of the sale.               subtraction  is  allowed  only  to  taxpayers  that  are 
                                                                 required  to  file IRS  Schedule  F,  Profit  or  Loss  From 
This  publication  is  designed  to  provide  general 
                                                                 Farming.  In  order  to  be  eligible  to  claim  the 
guidance  regarding the subtraction  and is intended  to 
                                                                 subtraction for any tax year, the taxpayer must not, at 
supplement  guidance  provided  in  the      Colorado 
                                                                 the time of the subtraction is claimed, either 
Individual  Income  Tax  Guide.  Nothing  in  this 
publication  modifies  or  is  intended  to  modify  the         ➢ have any overdue state tax liabilities, including 
requirements  of  Colorado’s  statutes  and  regulations.          any uncollectible tax liabilities resulting from 
Taxpayers are encouraged to consult their tax advisors             bankruptcy; or 
for guidance regarding specific situations.  
                                                                 ➢ be in default on any contractual obligations owed 
                                                                   to the state or to any local government within 
Tax years 2022 and later                                           Colorado. 

For tax years commencing on or after January 1, 2022,            A  qualified  taxpayer  may  claim  the  subtraction  for 
the  Colorado  capital  gain  subtraction  is  allowed  only     qualifying  capital  gains  the  taxpayer  recognizes  from 
for capital gains recognized by farmers from the sale of         property the taxpayer owns either directly or through a 
agricultural real property.                                      pass-through  entity,  such  as  a  partnership  or  S 
                                                                 corporation, provided that all applicable requirements 
Only taxpayers that are required to file IRS Schedule F,         are met. 
Profit or Loss From Farming, as an attachment to their 
federal  income  tax  return  for  the  tax  year  may  claim 
the  subtraction.  The  taxpayer  must  also  satisfy  all  of 
the  requirements  for qualified  taxpayers  discussed 
later in this publication. 

The  subtraction  may  be  claimed  only  for  qualifying 
gains  earned  on  real  property  that  is  classified  as 
agricultural  land  for  property  tax  purposes.  The 
qualifying  gains  must  also  satisfy  all  of  the 
requirements discussed later in this publication. If the 
real property is sold as a type of investment package, it 
qualifies for the subtraction only if at least 75% of the 
real  property  included  in  the  package  is  classified  as 
agricultural land for property tax purposes. Please see 
sections  39-22-518(2)(b)(II)(C)  and  39-1-102(1.6)(a), 
C.R.S. for additional information. 

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Income Tax Topics: Colorado Capital Gain Subtraction 

Qualifying capital gains                                         Qualifying tangible personal property 

The  subtraction  is  allowed  only  for  capital  gains  that   For tax years commencing on or after January 1,  2022 
meet  all  applicable  requirements.  Taxpayers  cannot          and later, capital gains from tangible personal property 
claim  a  subtraction  for  any  income  that  is  treated  as   do not qualify for the subtraction.  
ordinary  income  on  their  federal  income  tax  return, 
                                                                 For  tax  years  commencing  prior  to  January  1,  2022, 
including any recapture of depreciation.  
                                                                 capital  gains  from  tangible  personal  property  acquired 
Capital gains must satisfy all of the following criteria to      on or after May 9, 1994, but before June 4, 2009 qualify 
qualify for the subtraction:                                     for  the  subtraction  only  if  the  property  is  located  in 
                                                                 Colorado. Capital gains from tangible personal property 
 1) the  gain  must  be  included  in  the  qualified            acquired on or after June 4, 2009 need not be located in 
    taxpayer’s federal taxable income for the year of            Colorado to qualify for the subtraction. 
    the subtraction; 
                                                                 Acquisition date and holding period 
 2) the gain must be earned on either qualifying real 
    property or qualifying tangible personal property, 
                                                                 In order to qualify for the subtraction, the specific real 
    meeting the requirements described below; 
                                                                 or tangible personal property for which the subtraction 
 3) the  qualified  taxpayer  must  have  acquired  the          is  claimed  must  be  owned  by  the  taxpayer  without 
    property on or after May 9, 1994;                            interruption for a minimum of five years preceding the 
                                                                 sale. This minimum  holding period for the subtraction 
 4) the taxpayer must have owned the property for at             is  in  addition  to  any  holding  period  provisions  of  the 
    least five uninterrupted years prior to the sale.            Internal Revenue Code applicable to capital gain. The 
                                                                 following  sections  provide  information  regarding 
Qualifying real property 
                                                                 determination  of  acquisition  date  and  holding  periods 
                                                                 under various circumstances. 
Capital  gains  from  real  property  qualify  for  the  sub-
traction only if both of the following conditions are met: 
                                                                 Grantor trusts 
 ➢  the real property is located in Colorado; and 
                                                                 "Grantor trust"  refers only to those trusts that  qualify 
 ➢  the qualified taxpayer acquired the real property            for  the  definitions,  and  treatment  for  income  tax, 
    on or after May 9, 1994, but before June 4, 2009.            found  in  sections  671  through  677  of  the  Internal 
                                                                 Revenue Code. 
For tax years 2022 and later, the real property must be 
classified  as  agricultural  land  to  qualify  for  the        Due  to  the  unique  attributes  of  a  grantor  trust,  the 
subtraction.  Please  see Tax  years  2022  and  later,          transfer  of  an  asset  to  a  grantor  trust  does  not 
earlier in this publication, for additional information.         interrupt the holding period. Therefore, to determine if 
                                                                 the  sale  of  an  asset  meets  the  holding  period 
Real  property  located  outside  of  Colorado  and  real        requirements  of  the  subtraction,  the  acquisition  date 
property  acquired  on  or  after  June  4,  2009  do  not       of the asset will be considered to be the date when the 
qualify for the subtraction.                                     individual originally acquired title to the asset. This is 
                                                                 only  the  case  when  property  is  re-titled  between  a 
                                                                 grantor  trust  and  the  creator  of  the  trust  who  is  also 
                                                                 the owner of the property. 

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Income Tax Topics: Colorado Capital Gain Subtraction 

Divorce settlements                                             Example #1: A partnership purchases an asset on May 
                                                                10, 2000 and sells it on June 1, 2005. The partnership 
When  calculating  the  holding  period,  the  acquisition      acquired the asset on or after May 9, 1994 and held the 
date of property held by an individual after a divorce          asset for a period of at least five uninterrupted years 
will  be  determined  by  the  status  of  that  property       immediately  preceding  the  sale.  One  partner,  who 
during  the  marriage.  The  acquisition  date  of  property    became a partner prior to May 10, 2000, satisfies the 
that  is  not  jointly  titled  and  controlled  during  the    five-year  holding  period  and  qualifies  for  the 
marriage will be the date the asset is transferred to the       subtraction. A different partner, who became a partner 
spouse during the divorce.                                      June  2,  2000,  does  not  satisfy  the  five-year  holding 
                                                                requirement  and  therefore  cannot  claim  the  capital 
Pass-through entities and their members  
                                                                gain subtraction. 

A  taxpayer  who  realizes  qualifying  capital  gains  as  a 
                                                                Transfers between pass-through entities and members 
partner,  shareholder,  or  member  in  a  partnership,  S 
corporation, or other pass-through entity may be able           In  the  case  of  property  that  has  been  transferred 
to claim the subtraction, provided the gain satisfies all       between a pass-through entity and its members, special 
applicable requirements, including those regarding the          rules apply when determining whether a member may 
acquisition date and holding period. In general, all four       claim a subtraction.   
of  the  following  conditions  must  be  met  for  the 
partner,  shareholder,  or  member  to  be  able  to  claim     The  acquisition  date  for  determining  the  members’ 
the subtraction.                                                holding period of property that is transferred by a pass-
                                                                through  entity  to  its  members  is  the  date  the  pass-
 1) The gain from the sale of the asset by the pass-            through entity acquired the property. This assumes the 
    through  entity  must  satisfy  the  criteria  for          members owned their share of the entity for the entire 
    qualifying capital gains, detailed on page 1 of this        period  that  the  property  was  owned  by  the  pass-
    publication;                                                through entity. If any member acquired their share of 
                                                                the pass-through entity after the entity already owned 
 2) The  pass-through  entity  must  have  acquired  the 
                                                                the property, then the acquisition date of the property 
    asset on or after May 9, 1994; 
                                                                in  the  hands  of  the  member  would  be  the  date  they 
                                                                acquired their share of the entity. 
 3) The  pass-through  entity  must  have  owned  the 
    asset  for  at  least  five  uninterrupted  years 
                                                                The  acquisition  date  for  determining  the  members’ 
    immediately preceding the sale that gave rise to 
                                                                holding  period  of  property  that  is  transferred  by  one 
    the capital gain; and  
                                                                member to a pass-through entity is, for the transferor, 
                                                                the  date  that  the  transferring  member  acquired  the 
 4) The  partner,  shareholder,  or  member  must  have 
                                                                property, and, for all other members, the date of the 
    held their ownership interest in the pass-through 
                                                                transfer  to  the  pass-through  entity.  This  assumes  the 
    entity  for  at  least  five  uninterrupted  years 
                                                                members owned their share of the entity for the entire 
    immediately preceding the sale that gave rise to 
                                                                period  that  the  property  was  owned  by  the  pass-
    the capital gain. 
                                                                through entity. If any member acquired their share of 
                                                                the pass-through entity after the entity already owned 
                                                                the property, then the acquisition date of the property 
                                                                in  the  hands  of  that  member  would  be  the  date  they 
                                                                acquired their share of the entity. 

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Income Tax Topics: Colorado Capital Gain Subtraction 

Example #2: Qualifying property was acquired on May              Installment sales 
1,  1994,  by  an  individual,  transferred  to  an  S 
corporation  on  July  1,  1994,  that  is  wholly  owned  by    In  order  for  capital  gains  recognized  through 
the  individual,  and  then  sold  by  the  S  corporation  on   installment  sales  to  qualify  for  the  subtraction,  the 
July  30,  1999.  Therefore,  the  acquisition  date  of  the    asset  must  be  held  for  five  uninterrupted  years 
asset is May 1, 1994. The holding period is May 1, 1994,         immediately preceding the sale transaction date. If this 
through July 30, 1999. In  this example, the gain does           requirement  is  not  met,  no  gain  derived  from  any 
not qualify as the property was acquired before May 9,           installment payment qualifies for the subtraction, even 
1994.                                                            if  five  years  elapse  between  the  initial  acquisition  of 
                                                                 the payment and the date of the installment payment.  
Example  #3: Qualifying  property  was  acquired  on 
October  1,  1999  by  an  LLC  and  distributed  to  its        Example #6: An asset is purchased June 1, 2000, and 
members on November 15, 2002. The acquisition date               sold on April 1, 2005, with deferred payments received 
used  for  determining  if  the  capital  gain  subtraction      monthly from July 1, 2005, to December 31, 2008. The 
applies when a member sells the property is October 1,           capital  gains  from  this  transaction  do  not  qualify  for 
1999.                                                            the  subtraction  because  the  five-year  holding  period 
                                                                 was not met when the asset was sold. 
Example #4:  Qualifying property was acquired on June 
1, 2002 by an individual. The property was transferred           Example #7: Same facts as Example #6, above, except 
to  a  partnership  in  which  the  individual  was  a  40%      the  asset  was  acquired  January  1,  2000.  The  capital 
partner on July 1, 2003. The property is sold on June            gains  from  this  transaction  would  qualify  for  the 
15,  2008  by  the  partnership.  The  individual’s  holding     subtraction because the asset was held for the required 
period for the property was from June 1, 2002 through            five uninterrupted years preceding the sale. 
June  15,  2008,  which  qualifies  for  the  capital  gain 
subtraction.  However,  the  other  partners’  holding 
period for the property was from July 1, 2003 through            Limitations 
June  15,  2008,  which  does  not  meet  the  five-year 
                                                                 The  Colorado  capital  gain  subtraction  a  qualified 
holding period for the subtraction. 
                                                                 taxpayer can claim is limited to the lesser of:  
Example #5: Qualifying property was acquired on June 
                                                                 1) The total amount of the net capital gain reported 
1, 1992 by an individual. The property was transferred 
                                                                    on IRS Schedule D of the taxpayer’s federal return 
to  a  partnership  in  which  the  individual  was  a  40% 
                                                                    for all qualifying and non-qualifying property; or  
partner on July 1, 2000. The property is sold on June 
15,  2008  by  the  partnership.  The  individual’s 
                                                                 2) The qualifying capital gain; or 
acquisition  date  for  the  property  was  June  1,  1992, 
which does not qualify for the capital gain subtraction.         3) $100,000. 
However,  the  other  partners’  acquisition  date  for  the 
property was July 1, 2000, which does qualify for the            The  preceding  limitations  apply  with  respect  to  each 
subtraction.                                                     qualified taxpayer, whether such qualifying taxpayer is 
                                                                 an  individual,  estate,  trust,  or  corporation.  If  a 
                                                                 partnership, S corporation, or other pass-through entity 
                                                                 sells qualifying property, resulting in qualifying capital 
                                                                 gains, the preceding limitations apply to each partner, 
                                                                 shareholder, or member who recognizes gain from the 
                                                                 sale, but not to the pass-through entity as a whole. 

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Income Tax Topics: Colorado Capital Gain Subtraction 

Example #8: A taxpayer has a qualifying capital gain of           Additional resources 
$4,000, a non-qualifying capital gain of $500 and a non-
qualifying  capital  loss  of  $1,000,  for  a  federal  net      The  following  is  a  list  of  statutes,  regulations,  forms, 
capital gain of $3,500. The subtraction allowed on the            and  guidance  pertaining  to  Colorado  capital  gain 
Colorado return will be $3,500 (the lesser of $3,500 and          subtraction. This list is not, and is not intended to be, 
$4,000).                                                          an  exhaustive  list  of  authorities  that  govern  the  tax 
                                                                  treatment of every situation. Individuals and businesses 
Example #9: Same facts as Example #8, above, except 
                                                                  with  specific  questions  should  consult  their  tax 
the $1,000 loss is a qualifying Colorado capital loss. The 
                                                                  advisors. 
subtraction  allowed  in  this  example  would  be  $3,000 
(the lesser of $3,500 and $3,000). 
                                                                  Statutes and regulations 
Example #10: A partnership consisting of two partners 
sells  property  resulting  in  qualifying  capital  gains  of    ➢ § 39-22-104, C.R.S. Income tax imposed on 
$50,000 for one partner and $150,000 in qualifying for              individuals, estates, trusts. 
another partner. Neither partner has any other capital 
                                                                  ➢
gains  or  losses  during  the  tax  year.  The  first  partner     § 39-22-301, C.R.S. Corporate tax imposed. 

can  claim  a  subtraction  for  the  full  $50,000  of           ➢ § 39-22-304, C.R.S. Net income of corporation. 
qualifying capital gain they recognize. The subtraction 

the  second  partner  can  claim  is  limited  to  $100,000,      ➢ § 39-22-518, C.R.S. Tax modification for net 
rather  than  the  full  $150,000  of  qualifying  gain  they 
                                                                    capital gains. 
recognize. 
                                                                  ➢ Rule 39-22-518. Colorado Capital Gain Subtraction. 

Documentation 
                                                                  Forms and guidance 

In order to claim the Colorado capital gain subtraction,          ➢ Tax.Colorado.gov 
a  taxpayer  must  complete  and  submit  a Colorado 
Source  Capital  Gain  Affidavit  (DR  1316)  with  the           ➢ Colorado Source Capital Gain Affidavit (DR 1316) 
Colorado return upon which the subtraction is claimed. 
Forms  and  instructions  are  available  online  at              ➢ Capital Gains and Losses (IRS Schedule D) 
Tax.Colorado.gov.  Taxpayers  must  also  submit  with 
their  Colorado  return  copies  of  the  IRS  Schedule  D        ➢ Profit or Loss From Farming (IRS Schedule F) 
and/or  Form  4797  used  in  determining  the  amount  of 
                                                                  ➢
net capital gain. For tax years commencing on or after              Sales of Business Property (IRS Form 4797) 
January 1, 2022, taxpayers must also submit with their 
                                                                  ➢
Colorado return a copy of their IRS Schedule F, Profit              Installment Sale Income (IRS Form 6252) 
or  Loss  From  Farming.  The  Department  may  request 
additional documentation if necessary to determine the 
validity of any subtraction claimed. 

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                                                                                                  Revised February 2022