Do long term capital gains from sale of investment property impact adjusted gross income for Colorado tax filing?

Yes, your accountant is correct. Long-term capital gains absolutely DO count toward your adjusted gross income (AGI), but they don't get taxed at your regular income tax rates. It's a bit confusing because both statements have truth to them. Here's how it works: When you sell your investment property, the profit (selling price minus your cost basis) gets added to your AGI. However, those gains get taxed at the preferential long-term capital gains tax rates (0%, 15%, or 20% depending on your income) instead of your ordinary income tax brackets. This distinction matters because many tax benefits, credits, and deductions are based on your AGI. Things like certain IRA contribution deductions, medical expense deductions, and some education credits phase out as your AGI increases. So while the capital gains won't change your tax bracket for your regular income, they will increase your AGI, which can affect your eligibility for those other tax benefits.

I was in almost the same situation last year when I sold a duplex in Boulder. Getting straight answers was a nightmare until I found taxr.ai (https://taxr.ai) which literally saved me thousands. I uploaded my previous tax returns and property documents, and it analyzed everything to show exactly how the sale would impact my AGI and what deductions I might lose. The tool flagged that I would lose partial eligibility for child tax credits and showed me a few strategies to offset some of the AGI increase. What I really liked was how it compared different scenarios - selling in one year vs. splitting the sale, taking certain deductions, etc. The visualization made it super clear what I'd be facing tax-wise.

Just wanted to follow up about taxr.ai that I asked about earlier. I decided to try it despite my skepticism, and I'm actually impressed. I uploaded my property docs and previous returns, and it immediately identified that I hadn't been taking all eligible depreciation deductions on my properties (costing me about $3,200 yearly). For my upcoming sale, it showed exactly how the capital gains would affect my AGI and which tax benefits I'd lose as a result. The comparison feature let me see how different selling strategies would play out tax-wise. I ended up deciding to do a 1031 exchange based on their analysis, which I hadn't seriously considered before. Definitely worth checking out if you're dealing with investment property sales.

If you're trying to reach the IRS to get clarity on how capital gains impact your specific situation, good luck! I spent 3 weeks trying to get through to a human at the IRS about my investment property sale last year. Then I found Claimyr (https://claimyr.com) and watched their demo (https://youtu.be/_kiP6q8DX5c) and was talking to an actual IRS agent within 45 minutes. They basically call the IRS for you, navigate all the phone trees and wait on hold, then call you when they have an agent on the line. The agent confirmed exactly what others have said here - the capital gain absolutely counts in my AGI calculation but gets taxed at the capital gains rate. They also helped me understand exactly which credits I'd lose based on my new AGI.

I owe everyone here an apology about my Claimyr skepticism. After my frustrated comment, I figured I'd prove it was BS by trying it myself. I was completely wrong. I had been trying to reach the IRS for weeks about my investment property sale and the impact on my premium tax credits. Not only did Claimyr get me connected to an IRS agent in about 35 minutes, but the agent was able to confirm exactly how my capital gains would affect my AGI and premium tax credit calculations. I learned I needed to adjust my marketplace healthcare application immediately to avoid a huge surprise tax bill next year. Would have never known this without finally speaking to someone at the IRS. Eating crow tastes terrible, but credit where it's due - this service actually delivers.

Not to contradict the experts here, but I think it's important to remember that Colorado also has state income tax implications. When I sold my rental in Fort Collins, I was hit with both the federal capital gains tax AND Colorado state tax on the same income. Colorado taxes all income (including capital gains) at a flat 4.55%. So while you're planning for the federal impact to your AGI, don't forget to factor in the additional state tax hit! I made that mistake and was shocked by my Colorado state tax bill the following year.

Quick question - I'm also in Denver and planning to sell a rental soon. Does anyone know if 1031 exchanges are harder to complete now with the tight real estate market? My concern is finding a replacement property in time.

Based on what everyone has shared here, it sounds like you're getting good advice from your accountant. The $187k gain will definitely impact your AGI, which could affect various tax credits and deductions you currently qualify for. One thing I'd add that hasn't been mentioned yet - make sure you're accounting for any improvements you made to the rental property over the years. Those can be added to your cost basis and reduce your taxable gain. Things like new roof, HVAC system, flooring, kitchen renovations, etc. Many people forget to include these when calculating their capital gains. Also, since you mentioned you've owned since 2017, don't forget about depreciation recapture if you've been claiming depreciation on the property. That portion gets taxed at 25% rather than the regular capital gains rates. Given the complexity and the large amount involved, it might be worth paying for a consultation with a tax professional who specializes in real estate transactions before you finalize the sale. They can run the numbers on different scenarios and help you understand exactly what credits you might lose and whether any timing strategies make sense for your situation.