How to Pay Taxes on Vacation Rental Income: Colorado Non-Resident Filing Requirements
Tax considerations for part-year residents and nonresidents of Colorado can feel tricky and confusing at first. Depending on the Breckenridge real estate you own or want to buy, there might be tax matters to consider, such as if the property is generating income from renters. Additional tax questions may arise when deciding whether it's beneficial to retire part-time in Colorado or move full-time. In any scenario, whether buying your first vacation home or investing in a vacation rental, it's important to understand the tax laws in Colorado and how they may apply to you.
Non-Resident vs Part of Year Resident
There is a difference between a part-year resident and a nonresident and the tax requirements for each situation. A part-year resident is a person who has resided for only part of the tax year in Colorado. Individuals in this category have either moved to the state at some time during the year with the intention of making Colorado their permanent home or moved out of the state before the year has ended. This would apply to those buying a second home after retirement. When filing taxes, a part-year resident includes their taxable income as that of being a resident for a full year. Part-year residents have specific tax forms, the DR 0104 and DR 0104PN, to complete.
A non-resident is an individual who did not live anywhere within Colorado throughout the tax year but did receive income in the state. There are two situations that affect non-resident status. One is when an individual has worked temporarily in Colorado, and the other is if the individual had a source in Colorado that provided income. For tax filing purposes, a non-resident files an income tax return in Colorado if they received Colorado-sourced income that is taxable, or a federal income tax return is required from the individual.
How Is Income Tax Calculated for Partial Residents?
Whether you live in Colorado part-time or you are a nonresident with a source of income generated in Colorado, income tax must be paid. The filing process begins with the person's full federal taxable income using Form 0104. Form 104PN, which is the tax calculation schedule, is also completed by the part-year resident or nonresident. Once the tax is calculated, it is apportioned, which is a percentage determined by the person's income that can be taxed by Colorado.
The Colorado tax rate is calculated by multiplying the taxable income by the tax rate for the state and then multiplying the calculated figure by the apportionment percentage. The apportionment percentage is determined by the adjusted gross income on the individual's federal return after any modifications required per Colorado law.
Forms of Colorado-Source Income
Income can be designated as Colorado-source income in some, but not all cases. An individual earning a wage or receiving unemployment compensation is counted as Colorado-source income if the individual was physically in the state when the work was conducted.
Intangible personal property, such as bonds, dividends, stocks, royalties, etc., that generates income when the property is used for business purposes, whether that be in a professional, occupational, or trade capacity, is considered Colorado-source income. Tangible personal property and real personal property that generate income in the state from rent, capital gains or losses, and interest are also considered Colorado-source income. Income from gambling in a casino or participating in games of chance in Colorado is counted as a Colorado source of income. Nonresidents receiving retirement income is not considered Colorado-source income.
Retirement income in Colorado received by those who are nonresidents is not counted as Colorado-source income. Examples of what is considered retirement income include social security benefits, IRA distributions, annuities, tax-deferred savings plans, PERA retirement benefits, and certain other types of retirement pensions. An individual who receives survivor benefits also qualifies for the exclusion, regardless of their age.
What this means for those looking to settle in the best places to retire in Colorado is, when filing taxes, the state of Colorado excludes pension income from state income tax up to $20,000 per person annually. This amount is in effect for retirees who are ages 55 through 64. Retirees who are 65 and over have an exclusion of $24,000. Whatever age the retiree is on December 31 for that year's taxes is used as a factor in determining what exclusion amount the retiree is entitled to for that year.
Overall, for nonresident retirees, moving to Colorado on a permanent basis provides a tax benefit due to a generous deduction on retirement income.
Real Estate Income
Those who own real estate in Colorado but live in another state would need to file when certain conditions apply. Although a nonresident does not reside in the state, if they are filing a federal return, the property in Colorado generated an income, and there is an income tax liability for the year for the property in Colorado, the property owner must file a nonresident Colorado return. The income and deductions related to the property are considered Colorado-source income and deductions.
Nonresidents with investment property in Colorado have access to numerous tax breaks. These include:
- Advertising and marketing the investment property
- Credit card and home improvement loan interest related to the property
- Expenses paid to independent contractors for work done at the property, such as painting, landscaping, pressure washing, etc
- Expenses paid to an employee
- Mortgage interest
- Professional services — accounting, management, and legal
- Property loss that is not covered by insurance
- Property taxes — local city, county, and school
- Repairs to rental property
- Tax deductibility — building and land depreciation
- Travel expenses related to the property
Benefits of Knowing the Tax Laws
The best-laid plans for those considering living as a part-year resident or nonresident are those who understand the ins and outs of the tax laws for the state of Colorado. A sure way to do this is by using the services of a tax consultant and a certified public accountant. These professionals will guide you through the process and provide the information necessary to be in compliance with the state at tax time.