January 20, 2008 - I have just sold property located in Colorado, which is subject to capital gains tax. I've heard that the sale might be eligible for exclusion from Colorado income tax. Is that correct?

Qualified Colorado taxpayers may subtract certain net capital gain income earned from Colorado sources to the extent the gains are included in their federal taxable income.

A "qualified taxpayer" is any individual, firm, corporation, partnership, LLC, joint venture, estate, trust, or group or combination acting as a unit. A taxpayer must not have overdue state tax liabilities and not be in default on any contractual obligations owed to the state or any local government within Colorado at the time the Colorado source gain subtraction is claimed.

There are three different rules that determine which net capital gains qualify for the Colorado source capital gain subtraction. The first is a general rule that applies every year regardless of whether there is a budget surplus. This general rule is expanded in two circumstances, both of which depend on Colorado having a qualified budget surplus during the tax year.

Under the general rule, this subtraction is available to taxpayers who have net capital gains that meet the following qualifications:
• Gains must be earned from the sale of either:
-- Real or tangible property (not including intangible property such as patents, goodwill, customer lists or stock options) located in Colorado at the time of sale, or
-- Stocks or ownership interests in a Colorado company, LLC or partnership
• Acquisition date - taxpayer must have acquired the assets on or after May 9, 1994
• Holding period - taxpayer must have owned the capital asset for at least five uninterrupted years prior to the sale,
• Must be included in the taxpayer's federal taxable income reported on taxpayer's Colorado income tax return.

Under the first expanded circumstance, for any tax year beginning on or after January 1, 1999 and during which the state's fiscal year ends with a qualified surplus, the general rule is expanded to include gains on assets acquired before May 9, 1994. The requirements of a five-year holding period and gains earned from Colorado sources still apply in this situation.

Under the second expanded circumstance, for any tax year beginning on or after January 1, 2001 and during which the state's fiscal year ends with a qualified surplus, the general rule for the subtraction is expanded to include gains on assets held for at least one year. Except for the May 9, 1994 acquisition date and the five-year holding period, the other requirements of the general rule apply.

The subtraction applies only to net capital gains earned from property located in Colorado . Thus, capital gains realized from the sale of real or personal property qualifies for this subtraction only if the property is located in Colorado at the time of the transaction that gave rise to the gain.

The gain from the sale of stock or ownership interest also qualifies if the stock or ownership interest is of a " Colorado company, LLC or partnership." These are entities that have 50% or more of their property and 50% or more of their payroll assigned to Colorado under the Multistate Tax Compact for the required holding period. Because the sale of a sole proprietorship is not considered a sale of an entity, but only of its assets, such a sale does not qualify as a sale of an "ownership interest." Therefore, gains earned from intangibles owned by a sole proprietorship do not qualify for the subtraction.

Capital gain income that qualifies for this subtraction may be deducted only once. It is limited to the lesser of the amount of the federal net capital gain reported on the Schedule D or the qualifying Colorado net capital gain. If you claim the Colorado capital gain subtraction on a tax return, you must attach Form DR 1316 to the return. This form requests basic information regarding the capital gain, as well as an affidavit attesting that you qualified to claim the subtraction.

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