New Tax Laws Toward Investments in 2022

Colorado overhauled its state tax code in 2021, and many of the changes will have an impact on investors. Additionally, the federal government has adjusted various tax laws in response to inflation and the pandemic, so the tax landscape may be quite different from a year ago. Read on to find out how the changes affect investors, business owners, homeowners, and other Colorado taxpayers.

Property owners will get a break on their property taxes, Small-Business owners will get a tax cut

Itemized Deductions Are Capped for High Earners, Business Owners

For taxes due in 2022, households that make more than $400,000 a year can only claim $60,000 in itemized deductions. Additionally, business owners who make more than $500,000 in individual income or $1 million as a household will not be allowed to take the “pass through” deduction, which allows individuals to deduct business income from their personal taxes. The deduction had been temporarily suspended in 2012, but this time, it’s permanent.

For Colorado homeowners, homeowner tax deductions remain largely unchanged.

Capital Gains Will Be Subject to State Taxes

Previously, Colorado residents who paid federal capital gains taxes were exempt from capital gains at the state level. Those days are gone. There’s a small category of agricultural property owners who will still be able to deduct capital gains, but most Colorado taxpayers will have to pay capital gains taxes on their investment income.

However, Coloradans can still access one of the most effective ways to protect their capital gains — the 1031 exchange. Using a 1031 exchange in Colorado, investors can defer capital gains payment by reinvesting profits from the sale of a property into a like-kind property. The best part is, investors can use a 1031 exchange repeatedly, building up their real estate portfolio and deferring capital gains endlessly.

State Property Taxes Will Decrease

Property owners will get a break on their property taxes in 2022 and 2023. Single-family homes will see a reduction of about 3%, apartment properties will see a 5% reduction, and agricultural and renewable energy properties will get a discount of about 9%. Colorado also expanded a property tax deferment program for owners whose taxes increase dramatically.

This change is likely a response to skyrocketing home values in Colorado. By 2025, one recent analysis estimates that the assessed value of residential property in all of Colorado is projected to increase by nearly 40% — from $7.3 billion to $13.9 billion.

Under the present statewide property tax system, revenue would almost double, which could strain many homeowners and home buyers, even with sweeteners, such as home buyer rebates that make homeownership more affordable.

Small-Business Owners Will Get a Tax Cut

Previously, business owners had to pay a personal property tax on office items, such as equipment, furniture, or electronics. Under the old law, anything over $7,900 was taxable. However, recent changes raised the threshold to $50,000, giving small businesses a big break.

Coloradans Could Pay State Taxes With Cryptocurrency

In February, Gov. Jared Polis announced at a crypto conference in Denver that the state was planning to accept cryptocurrency as a tax payment method starting sometime in 2022. This proposal comes after years of positioning Colorado as a leader in the crypto economy.

However, financial experts warn that using cryptocurrency to pay state taxes could be complicated. If the crypto used to pay state taxes appreciates in value, disposing of it will trigger capital gains taxes — meaning that crypto holders could get pinged with another tax bill.

First-Time Stockholders, Take Note

In 2021, “meme stocks,” such as GameStop and AMC, gained popularity through social media, especially among Gen Z and millennial investors. Profit on an investment held for less than one year is considered short-term capital gains, which is taxed like ordinary income. For stocks held longer than a year, profits are considered long-term capital gains, which are subject to tax rates of 0%, 15%, or 20% depending on income.

Finally, for investors who bought high and took a loss, there’s a silver lining. Those investors can deduct up to $3,000 in losses against their regular income. If they lost more than that, they could carry it forward in subsequent years.

Changes to Roth IRA Accounts Could Be on the Way

The “Build Back Better” bill that’s currently before Congress contains a proposal that would end “backdoor” Roth IRAs — a strategy wealthy taxpayers use to avoid Roth IRA income restrictions. This new law would only affect taxpayers with incomes of $400,000 or more, and it wouldn’t take effect for several years, meaning most people could still take advantage of this financial hack.

Luke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers, and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the L.A. Times, and more.