Does a nonresident who buys Colorado tax lien certificates owe Colorado income tax on the interest the property owner pays to redeem them?

Plain-English summary

When a Colorado property owner falls behind on property taxes, the county can sell a tax lien certificate to a bidder. The owner has three years to redeem the property by repaying the bid plus interest; if they don't, the bidder gets a tax deed. A nonresident individual who buys these certificates as an investment asked whether the interest he collects is Colorado-source income subject to Colorado tax. The Department's answer: yes.

A nonresident is taxed only on Colorado-source income, defined in § 39-22-109(2)(a). The Department found the tax-lien interest qualifies under three independent provisions — and meeting any one is enough:

• (I) Ownership of an interest in Colorado real property. A tax lien certificate is itself an "interest" in real property — full ownership isn't required (a leasehold counts too). Even though the buyer's interest is contingent on the owner not redeeming, he still holds an interest in Colorado real property, and the interest income is directly attributable to it.
• (V) Income from an intangible used in a Colorado business. The statutory right to receive interest is an intangible. Buying a tax lien as an investment is a commercial transaction carried on in Colorado — and that's true even for a single transaction (the Department's analogy: an out-of-state company making one big machinery sale in Colorado is still carrying on business here).
• (II) Carrying on a business in Colorado. For the same reasons, the nonresident is carrying on a business in Colorado.

So the nonresident must file a Colorado return and pay Colorado tax on the interest. As a GIL, this is general guidance only.

What this means for you

Out-of-state tax-lien investors

If you buy Colorado tax lien certificates, the interest you earn is Colorado-source income — you'll generally owe Colorado income tax and need to file a nonresident Colorado return, even if you never set foot in the state and even if you bought just one certificate. The certificate is treated as an interest in Colorado real property.

Nonresidents earning interest from Colorado activities

Interest isn't automatically tax-free to a nonresident. When it flows from an interest in Colorado real property or an intangible used in a Colorado business, it's sourced to Colorado and taxed.

Accountants and tax professionals

Three independent hooks under § 39-22-109(2)(a) — (I) real-property interest, (V) intangible used in a Colorado business, and (II) carrying on a business — any one sufficing. Note the Department's position that a single investment transaction can constitute carrying on a business in Colorado.

Common questions

Q: I'm a nonresident who buys Colorado tax lien certificates. Is the interest taxable in Colorado?
A: Yes. It's Colorado-source income because the certificate is an interest in Colorado real property and is used in a commercial activity carried on in Colorado.

Q: What if I only bought one certificate?
A: It still counts. The Department treats even a single investment transaction as carrying on a business in Colorado.

Q: Does it matter that my interest is contingent on the owner not redeeming?
A: No. A contingent interest is still an ownership interest in real property for this purpose.

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance only, not binding on the Department. A binding answer requires a private letter ruling.

Citations and references

Statutes and rules:
- § 39-22-109(2)(a), C.R.S. (nonresident Colorado-source income)
- § 39-22-109(2)(a)(I), C.R.S. (interest in Colorado real property)
- § 39-22-109(2)(a)(II), C.R.S. (business carried on in Colorado)
- § 39-22-109(2)(a)(V), C.R.S. (intangible used in a Colorado business)
- 1 CCR 201-1, Rule 24-35-103.5 (GIL/PLR procedure)

Source

• Landing page: https://tax.colorado.gov/all-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-14-019.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-14-019

July 28, 2014
XXXXXXXXXXX
Attn: XXXXXXX
XXXXXXXXXXX
XXXXXXXXXXX
Re: Income Earned by Nonresident
Dear XXXXXXXXXXX,
You submitted on behalf of your client (''Taxpayer") a request for guidance regarding the
taxability of interest earned by a nonresident individual on tax lien certificates.
The Department issues general information letters and private letter rulings. A general
information letter provides a general overview of the relevant tax issues and is not binding
on the Department. A private letter ruling provides a specific determination for a specific
set of facts, is binding on the Department but not on the taxpayer, and requires payment of
a fee. For more information about general information letters and private letter rulings,
please see Department Rule 24-35-103.5 at www.colorado.gov/revenue/tax > Tax Library

Rulings.
The Department initially treats your request as one of a general information letter. If you
would like the Department to issue a private letter ruling on the issues you raise, you can
resubmit a request and fee in compliance with Department Rule 24-35-103.5. It is
important to remember that general information letters, such as this one, are general
discussions of tax law and are not a determination of the tax consequence of any
particular action or inaction.
Issues
Is the interest earned by a nonresident individual on tax lien certificates income that must
be sourced to Colorado?
Background
When a real property owner becomes delinquent on real property taxes, a tax lien is
created and the county can foreclose on the real property to recover the tax. As part of
the foreclosure process, successful bidders are issued a tax certificate. The real property
owner has three years in which to redeem the property by paying the successful bidder
theamount of the bid and interest accrued from the time the certificate was purchased to

when the property owner redeems the certificate. If the property is not redeemed, the
bidder is issued a tax deed for the property.
Taxpayer is a nonresident individual who purchases tax lien certificates. Interest is paid to
the Taxpayer by the owner. Taxpayer requests guidance whether, as a nonresident, such
income is subject to Colorado income tax.
Discussion
A nonresident individual is subject to Colorado income tax if such individual derives
income from sources within Colorado. Income is derived from sources within Colorado if
the income is attributable to:
(I) The ownership of any interest in real or tangible personal property
in Colorado;
(II) A business, trade, profession, or occupation carried on in
Colorado;
(Ill) The distributive share of partnership or limited liability company
income, gain, loss, and deduction.
(IV) The share of estate or trust income, gain, loss, and deduction.
(V) Income from intangible personal property, including annuities,
dividends, interest, and gains from the disposition of intangible
personal property to the extent that such income is from property
employed in a business, trade, profession, or occupation carried
on in Colorado;
(VI) The share of subchapter S corporation income, gain, loss, credit,
and deduction allocable or apportionable to Colorado.1
There are three provisions that likely apply to the interest income. Meeting any one of the
three provisions is sufficient to require Taxpayer to file a Colorado income tax return and
pay Colorado income tax. First, the interest income is income from an ownership of an
"interest" in real property (subparagraph I). Specifically, the tax lien certificate represents
an "interest" in real property and the interest is directly attributable to that interest. This
provision does not require that the "interest" be full ownership of the real property; it only
requires that the taxpayer have an ownership in an interest. For example, a leasehold
interest in real property is ownership of an interest in real property. Although Taxpayer
may have only a contingent interest in the property because the homeowner maintains the
right to redeem the certificate, taxpayer nevertheless has an interest in the real property.
Second, Taxpayer has a statutory right to receive interest until the property is redeemed.
This statutory right is an intangible property right. For income derived from an intangible to
be taxable in Colorado (subparagraph V), Taxpayer must use the intangible in a business,
trade, profession, or occupation carried on in Colorado. The purchase of a tax lien is a
commercial transaction if Taxpayer is purchasing the property as an investment (rather
than a personal residence), even if Taxpayer only engages in a single transaction. For
example, if an out-of-state company sells in Colorado a large piece of machinery and that
was the company's only transaction in Colorado, the Department would still treat that
1

3

§39-22-109(2)(a), C.R.S.

DR 4010A (06/11/14)

company as carrying on a business, trade, profession, or occupation in Colorado. In the
case at hand, the tax certificate is being used in Colorado in a commercial transaction that
is entered into in Colorado, and the tax certificate represents an interest in Colorado real
property and is governed by the laws of Colorado.
Lastly, Taxpayer is carrying on a business, trade, profession, or occupation in Colorado for
the reasons set forth above (subparagraph II).
Miscellaneous
This letter represents the good faith opinion of Department personnel who are
knowledgeable on state taxes issues. However, the Department does not make a specific
determination here on any of the issues raised and the Department is not bound by this
general information letter.
Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this
redacted letter will be made public within 60 days of the date of this letter. Please let me
know in writing within that 60 day period whether you have any suggestions or concerns
about this redacted letter.
Sincerely,
Office of Tax Policy
Colorado Department of Revenue

4

DR 4010A (06/11/14)