Tax Aversion Therapies · for homeowners
Diagnosis: a house bought for a number that now sounds like a down payment, a mortgage that was refinanced twice, and a standard deduction that swallowed the interest.
Prognosis: the biggest tax break most people will ever get is still available, if the timing is right.
There is no cure for property tax. These are the therapies.
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The home is the largest asset most families own and the most-favored one in the code: up to $500,000 of gain tax-free, interest deductible within limits, and a step-up at death for whatever is left. It is also where the 2017 and 2025 acts changed the most. The standard deduction grew until most mortgages no longer produce an itemized deduction; the SALT cap limits property tax; and the exclusion, unchanged since 1997, no longer covers a long-held Front Range house.
These nine therapies are the ones that still work, with the 2026 numbers, and the Colorado property-tax breaks that have nothing to do with the income tax return but belong on this list because the office gets asked about them every spring.
Dose: $250,000 of gain excluded ($500,000 joint) on a home you owned and lived in for two of the five years before the sale; available once every two years, for life; no age limit, no rollover requirement.
Serial use is legal. A couple that buys, improves, lives in a house for two years and sells can exclude $500,000 each time. A partial exclusion is available for a sale before two years if the reason is a job change (50 miles), health, or an unforeseen circumstance (divorce, multiple births, a job loss), prorated by months. Gain is sale price less selling costs less basis, and basis includes every improvement since purchase; the receipts for the 2009 kitchen are worth 15% of their face in tax. Full article: Selling Your Home.
↑ Back to topDose: after moving out, the two-of-five test is met for roughly three more years; after a spouse’s death, the surviving spouse keeps the $500,000 exclusion for a sale within two years, and the decedent’s half of the house stepped up at death.
The two windows decide more tax than any other item on this page. A couple that moves to the new house and keeps the old one “for a while” has until the three-year mark to sell with the full exclusion; after that, zero. A widow who sells in year one or two excludes $500,000 of a gain that was already cut in half by the step-up; in year three the exclusion is $250,000. In a divorce, a sale while both still own it gives each spouse $250,000; a sale after one spouse takes the house gives that spouse $250,000. Full articles: Inherited Property, Divorce and Taxes.
↑ Back to topDose: interest on up to $750,000 of debt used to buy, build or improve the home ($1,000,000 for pre-December 16, 2017 loans, including their refinanced balance); cash-out deductible only to the extent spent on the home.
A refinance keeps the deduction for the old balance; the increase is traced to what it bought. Cash-out spent on a kitchen is deductible for thirty years; cash-out spent on cars is not, and the 1098 doesn’t know the difference. Points on a refinance spread over the loan; the unamortized balance is deductible when the loan is paid off. Full article: Mortgage Interest After a Refinance.
↑ Back to topDose: PMI, FHA mortgage insurance, VA funding fees and USDA guarantee fees deductible as mortgage interest starting with 2026 returns, permanently; phases out between $100,000 and $110,000 of AGI.
Box 5 of the 1098. Buyers with less than 20% down in the last few years have been paying $150 to $400 a month of insurance with no deduction; for those under the income limit who itemize, it is back. Combined with a high-rate mortgage, a 2024 or 2025 buyer may itemize for the first time.
↑ Back to topDose: in alternate years, pay two years of charitable gifts (or one into a donor-advised fund) and, where possible, two property tax installments, to clear $32,200 (joint) by a wide margin; take the standard deduction in the off years.
A couple with $14,000 of mortgage interest, $9,000 of property and state taxes, and $6,000 of annual giving has $29,000 of deductions, under the standard deduction every year, and deducts none of it. Giving $12,000 every other year makes the on-year $35,000 and the off-year $23,000 (standard $32,200): about $2,800 more in deductions over two years, worth $600 to $900. Colorado property tax is payable in two halves (February and June) or one (April); paying the second half of one year in December and the full next year in the same calendar year puts two years in one. Full article: Itemized or Standard?.
↑ Back to topDose: rent your home (or a second home you use) for 14 days or fewer in a year and the rent is not income, no matter the amount.
A Castle Rock house during a tournament, a Denver condo during a convention, a Breckenridge condo for two peak weeks. A business owner can also rent the home to the business for a meeting at a documented market rate for up to 14 days; the business deducts it and the owner excludes it, within reason and with minutes. Day fifteen makes the whole year reportable. Full article: Your Home as Income.
↑ Back to topDose: depreciate from the lower of cost or value at conversion; sell within three years of moving out and the full exclusion still applies, with only the depreciation taxed at 25%.
The rental years after you move out don’t reduce the exclusion (the nonqualified-use rule reaches only periods before the last use as a residence). The depreciation is recaptured regardless. A three-year rental followed by a sale with the exclusion is often the best outcome for a house with moderate gain; for a house with gain above the exclusion, see the next therapy. Get a broker’s opinion of value on the day you move out. Full article: Your Home as Income.
↑ Back to topDose: a long-held home with $900,000 of gain: convert to a rental, hold it as a rental (two years is the usual safe period), sell through a 1031 exchange within the three-year exclusion window; exclude $500,000 under §121 and defer the rest into the replacement rental.
The IRS blessed the combination in 2005. The replacement property has to be investment property, the exchange has the 45-day and 180-day deadlines and a qualified intermediary, and the deferred gain carries into the new property’s basis, where it is stepped up at death if the owner holds it that long. For a Denver-area couple who bought in 1995, this is the only therapy that reaches the whole gain. Full article: Combining the Exclusion with a 1031 Exchange.
↑ Back to topDose: at 65, after ten years in the same home, 50% of the first $200,000 of actual value is exempt from property tax (about $600 to $900 a year in the metro area); the 2025 act of the legislature made the exemption portable for seniors who move (verify the portability provisions and effective date); seniors and active-duty military can defer property tax entirely as a lien on the home; and low-income seniors and disabled residents can claim the Property Tax/Rent/Heat rebate (PTC) of up to about $1,100.
None of these is on the income tax return. The exemption is a one-time application with the county assessor by July 15; the deferral is an application with the Treasurer; the PTC rebate is Form DR 0104PTC. We see seniors who have lived in the same house for thirty years and never applied for the exemption. Also on the Colorado income tax return: the subtraction for interest on U.S. obligations doesn’t touch homeowners, but the Colorado-specific child care and EITC credits are on other pages, and the state has no mortgage interest adjustment of its own. Full article: Colorado Income Tax: The Highlights.
↑ Back to topYes, three things. Hold it until death and the entire gain disappears in the step-up. Or convert it to a rental and sell through a 1031 exchange within three years of moving out, excluding $500,000 and deferring the rest. Or sell and pay 15% to 20% federal plus 4.40% Colorado on the gain above $500,000, which is still a smaller rate than most income. The wrong answer is to sell in a hurry without running the three.
For tax purposes, the sale within two years of her death keeps the $500,000 exclusion, and her half of the house already stepped up to its value at death, so most or all of the gain is likely covered. After two years the exclusion is $250,000. The timing is a tax answer only; the rest is yours.
Under the $32,200 standard deduction, yes, unless you bunch: concentrate two years of charitable giving into one year, and where possible two years of property tax, so that one year clears the standard deduction by a lot and the next year takes the standard. It recovers part of the value.
Yes, for 2026 returns onward, permanently, for taxpayers with adjusted gross income under $100,000 (phasing out to $110,000). It appears in box 5 of your 1098 and is deducted with mortgage interest if you itemize.
For the Tax Shop desk · the limits, elections and recapture rules behind each therapy
Before listing a house, before moving out of one, and before a refinance closes, call. The exclusion is decided by dates; the interest deduction is decided by where the cash went; the Colorado senior exemption is decided by whether anyone filled out the form. Bring the closing statements from when you bought, the receipts for the improvements you remember, and the 1098, and we will tell you which of these nine applies and what the number is.
Call 303-734-1040 or stop by the office in Lone Tree. We’ve been reading the footnotes for Douglas County and the Denver area since 1969.
Figures reflect the 2026 tax year as currently published and are rounded for readability. Items marked (verify) are to be confirmed against IRS or Colorado DOR sources before the figures freeze in December. Last updated October 15, 2026.
