What is the most significant tax for Vermont home sellers?
What is the Vermont Income Tax?
What is the Vermont Real Estate Withholding Tax?
What is the Vermont Land Gains Tax?
What are the Vermont Use Values for 2015?
For buyers, the chief tax when purchasing is the property transfer tax.
First enacted in 1968, the Vermont Property Transfer Tax is a tax on the sale of Vermont realestate that is imposed at the time a deed is presented to the town clerk for recording. The buyer is liable for the tax unless the parties agree that the seller will pay the tax. At present, the tax rate is 1.45% of the sale price of the real estate being sold as of July 1,2015.
Two lower tax rates exist for particular types of property:
1) For property that will be the primary residence of the buyer, the transfer tax is lowered to .5% on the first $100,000 of the sale price, but rises to the regular rate of 1.45% for that portion of the sale price that is above $100,000. Some lower income buyers pay 0% on the first part of the tax.
2) For property that is enrolled in the state’s current use program (a program which reduces property taxes on agricultural and forest land) or for property which is a working farm at the time of the transfer, the transfer tax is lowered to .5% of the entire sale price. Under a bill (H.485) that was vetoed in 2010, the transfer tax on enrolled current use land would have risen to 1.25%. Current use land which is “developed” may also be subject to a penalty of either 10% or 20% of the fair market value of the property as of the time it leaves the program, depending on how long it was enrolled. The law provides for several exemptions from the tax. Some of these include: a transfer directly to a creditor to secure a debt; a transfer without payment between a husband and wife, parent and child, grandparent and grandchild, or partners in a civil union; and transfers to a corporation, partnership or LLC at the time of formation, if no gain or loss is recognized under the federal tax code. Usually the property transfer tax form is filled out by the seller’s attorney and signed by the parties at the closing. Note that the tax only applies to real property, so any personal property – such as kitchen appliances, furniture, etc. – is not taxed. The greater the percentage of the total sale price that is allocated to personal property, the lower the property transfer tax will be.
For information on the property transfer tax, call the Vermont Tax Department at 802-828-2542.
For sellers (and for buyers who want to know what they will face when they eventually sell), the most relevant state taxes are the state capital gains tax, the non-resident withholding tax, and the land gains tax. Sellers should understand that gains on the sale of land, vacation homes and investment real estate are almost always taxable by Vermont, even if the seller lives out of state.
Vermont taxes capital gains, just as the federal government does. The gain is due on the sale of real estate here – whether or not the seller is a resident of Vermont – but there is a substantial exclusion if the property being sold was the primary residence of the seller.
Under Vermont’s system, federal rules for calculating basis and gain on the sale of real estate apply, including the exclusion from the federal capital gains tax for those selling primary residences. Specifically, you may exclude $250,000 of gain (or $500,000 if you are married filing jointly)on the sale of a house, if it was your principal residence for two out of five years before the sale. This exclusion can be used more than once, but only for one sale every two years. There is also an alternative 40% exemption for gains on certain assets – including land, some investment vacation homes, apartment buildings, commercial properties, standing timber, depreciable farm property, and businesses – if they are held for more than three years.
According to the state Tax Department, “A taxpayer may choose the exclusion that results in the greater tax reduction, but may not take both exclusions in one tax year. For a nonresident of Vermont selling real estate here, the amount of tax due is calculated by establishing what the Vermont tax would be if the seller’s income were all taxed in Vermont, then charging the same percentage of this figure that the Vermont real estate gain is of the seller’s total income for the year. Any taxes which a nonresident pays to Vermont for a capital gain can usually be used to offset tax liability to the seller’s state of residency, if a tax applies in that state.
Vermont uses a withholding tax to make sure that nonresidents pay capital gains taxes to the state of Vermont upon the sale of real estate here. The measure was enacted in 1989 as a “collection tool.” When Vermont property is sold by a nonresident of Vermont, the buyer is required to withhold 2.5% of the amount paid for the transfer and transmit this amount to the Vermont Department of Taxes within 30 days of the sale. A “nonresident” includes someone who once lived in a Vermont property as a primary residence but has already begun living in another state or country. The amount withheld is considered a payment against the Vermont income tax on the funds received by the seller. If no gain occurred or the amount withheld is more than the tax, the seller can get a refund. A buyer who fails to withhold 2.5% of the sales price at the closing is personally liable for the tax. Withholding from a nonresident is not necessary, or may be reduced, if before the closing the buyer or seller obtains a certificate from the Commissioner of Taxes. These are available if 1) no tax will be due, 2) the seller or buyer has provided adequate security to cover the tax liability, or 3) reduced withholding is appropriate because the 2.5% amount exceeds the seller’s maximum tax liability.
For more information on the Vermont Income or Withholding tax, call the Vermont Tax Department at 802-828-2777,
Sellers who have a gain on the sale of Vermont property may be liable for this unique tax designed to deter land speculation. First effective in 1973, the tax imposes very high taxes on sales of land held a short time and sold for a large profit. The land gains tax is only imposed on the gain from the sale or exchange of Vermont land that was held less than six years, with several exceptions. It applies in addition to any capital gains income tax that may also be due. The tax is determined at a flat rate based on the ratio of gain to basis. The tax goes from a high of 80% for gains over 200% on land held less than 4 months to a low of 5% for gains of less than100% on land held between 5 and 6 years. Property held longer than 6 years is not subject to the tax. The tax only applies to land, not buildings. Where buildings are present, an allocation of the sale price between the land and the building(s) must be made. The Tax Department prefers to use the allocation of value that is shown on the town listers’ tax assessment card for that property.
Any gain from selling timber or timber rights within six years is not covered by the land gains tax unless the property consists of 300 or more acres of contiguous land. In this case, the gain from any timber sale is counted in the land gains tax calculation,if the underlying land is sold within six years.
However, even for lots under 300 acres, logging reduces the basis of the land, and therefore may affect the tax, if you sell within six years. Under the law, certain types of land are not subject to the land gains tax, including the first 10 acres of land which was part of the principal residence of the seller within one year prior to sale, or which will be occupied as the principal residence of the buyer within one year after the sale (if there is no house on the property, the buyer can take up to two years to build and occupy a primary residence and still qualify for this exclusion). In addition, Vermont will forgive any land gains tax if the sale of a primary home is exempt under the federal capital gains exclusion of $250,000 for a single person and $500,000 for a married couple. In this case, the 10-acre limit does not come into play; a house on 100 acres, for example, might be exempted from the land gains tax.
There is also a “builder’s exemption” for up to ten acres of land where a house will be built and sold for use as a primary residence. The house must be started within one year, completed within two years, and sold within three years. Sales of vacation homes held less than six years and sold for a gain create land gains tax liability on the land’s increase in value, but if a vacation home changes use – from a vacation home to a primary home – then up to ten acres of the land is not subject to the tax. Unless a certificate is obtained from the Tax Department ahead of time, the buyer must withhold 10% of the purchase price of the land at the time of the transfer, if the property has been held fewer than six years. This amount must be remitted to the Tax Department immediately, along with a land gains withholding tax form. The seller must file a land gains tax return within 30 days of the transfer, paying any balance of the tax or requesting a refund.
For more information on the land gains tax, call the Vermont Tax Department at 802-828-2550
Vermont’s Use Value Appraisal (UVA) Program, also called “Current Use” or “Land Use”, enables landowners who practice long-term forest management to have their enrolled land appraised for property taxes based on its value for forestry, rather than its fair market (development) value. When land is enrolled in the UVA program, the State attaches a permanent lien to the deed. Productive forest land appraised under this program receives this assessment as long as it is actively managed, unless the landowner decides to withdraw the land from the program, the legislature ends the program, or the parcel is discontinued by the Division of Property Valuation & Review. If enrolled forest land is developed or harvested improperly, a land use change tax is levied on the developed portion and all or a portion will be discontinued from UVA.
In 1978 the legislature passed the Use Value Appraisal (Current Use) law. The purpose of the law was to allow the valuation and taxation of farm and forest land based on its remaining in agricultural or forest use instead of its value in the market place. The primary objectives of the program were to keep Vermont's agricultural and forest land in production, help slow the development of these lands, and achieve greater equity in property taxation on undeveloped land. Benefits for land enrolled in the program were first distributed in tax year 1980.
Participation in the program has grown as it has evolved. The two most significant changes have been the inclusion of conservation land owned by qualifying nonprofit organizations and the exemption from all property taxes of eligible farm buildings.
When an application is approved and recorded in the municipal land records a lien is established on the enrolled land to recover a land use change tax should all or any portion of the enrolled land become developed.
Currently there are over 17,000 properties enrolled totaling more than 2.3 million acres. This represents approximately 1/3 of Vermont's total land area.
For the 2015 tax year, the Current Use Advisory Board has established the following use values:
Agricultural Land $289/acre
Forest Land $131/acre
Forest Land greater than one mile from a Class 1, 2, or 3 Road $98/acre
For additional information 802-828-6636.