1031 Exchange in Vermont: 2.5% Withholding, Transfer Tax and Land Gains Tax

The 2.5 percent nonresident withholding and how an exchange seller gets it reduced

When a nonresident sells Vermont real estate, 32 V.S.A. § 5847 requires the buyer to withhold 2.5 percent of the consideration and send it to the Department of Taxes within 30 days on Form RW-171, the Vermont Withholding Tax Return for Transfer of Real Property. A nonresident is anyone domiciled outside Vermont at closing, an entity counts as nonresident if nonresidents hold its controlling interest, and if any one seller is a nonresident the whole sale is subject to withholding.

For an exchange seller that 2.5 percent would otherwise leave the exchange escrow and sit with the state until the return is filed. The fix is a Commissioner's Certificate, requested online through myVTax before closing; the Department's own list of reasons for a certificate includes 'Transaction is part of a §1031 exchange agreement,' alongside a loss on the sale, a federal §121 exclusion, Vermont-resident sellers and other cases where gain is not recognized federally.

The application needs proof of basis, and the Department's fact sheet FS-1177 says the basis documentation for a certificate is the same as for a rental sale: three years of federal Schedule E, the depreciation schedule and evidence of improvements. Assemble that file when you sign the listing agreement rather than the week of closing. With a certificate in hand, the buyer checks 'less than 2.5%' on RW-171, enters the certificate number and withholds the reduced amount, which can be zero.

Vermont income tax on the gain: 2025 brackets and the 40 percent exclusion for property held over three years

Vermont builds taxable income on federal adjusted gross income under 32 V.S.A. § 5811(21), so gain that a Section 1031 exchange removes from federal AGI never appears on Form IN-111, and no Vermont form reports the deferral. Nonresidents must file if they had more than $1,000 of gross Vermont-source income, which includes gross rent from Vermont property, so most out-of-state landlords already file Form IN-111.

If you sell without an exchange, the 2025 rate schedule taxes a single filer at 3.35 percent up to $49,400, 6.6 percent to $119,700, 7.6 percent to $249,700 and 8.75 percent above that; joint filers reach 8.75 percent above $304,000. Vermont then allows either a flat $5,000 exclusion of adjusted net capital gain or a 40 percent exclusion of gain on assets held more than three years, capped at the lesser of 40 percent of federal taxable income or $350,000.

The 40 percent exclusion is unusual among states in that it does cover investment real estate: the statute carves out real estate used as the taxpayer's primary or nonprimary residence, depreciable personal property and publicly traded stocks and bonds, but not a rental building or land. A long-held Vermont rental sold outright therefore faces Vermont tax on at most 60 percent of the gain, which is worth comparing against full deferral before committing to an exchange; the federal tax is unaffected either way.

Vermont has no claw-back. Unlike California's Form FTB 3840, nothing requires a Vermont seller to report deferred gain in later years, and once you exchange into property or a DST outside Vermont the state's claim ends unless you remain a Vermont resident, in which case your worldwide income stays taxable here.

Property transfer tax: 1.25 percent, or 3.4 percent on a non-rental second home since August 2024

The buyer pays Vermont's property transfer tax on Form PTT-172 when the deed is recorded. The general rate under 32 V.S.A. § 9602 is 1.25 percent of value; a buyer's principal residence pays 0.5 percent on the first $200,000 and 1.25 percent above; and, since Act 181 took effect on August 1, 2024, a 3.4 percent rate applies to residential property fit for year-round habitation that will not be the buyer's principal residence and for which the buyer will not have to file a landlord certificate.

That last condition is the investor's hinge. A house bought to rent long-term requires a landlord certificate, so it stays at 1.25 percent; a house bought as a second home or for nightly rental pays 3.4 percent. The Department's rate table adds the 0.22 percent clean water surcharge, listing 1.47 percent and 3.62 percent all-in for those tiers.

Because the buyer pays, a Vermont seller bears no transfer tax on the relinquished property, and an exchange does not alter the buyer's bill. A DST interest is not a Vermont deed, so buying one triggers no PTT; a seller who instead buys Vermont replacement property should confirm which tier applies before identifying.

Land gains tax applies to a 'sale or exchange' of recently subdivided land

Vermont's land gains tax reaches gain on land that the seller purchased and subdivided within the six years before the sale or exchange, the definition in 32 V.S.A. § 10002 as narrowed effective January 1, 2020. Rates in § 10003 run from 5 percent of gain for land held five to six years with a gain under 100 percent of basis up to 80 percent for land held under four months with a gain of 200 percent or more.

The buyer withholds 10 percent of the consideration attributable to land on Form LGT-177 and the seller files LGT-178 within 30 days; a Land Gains Commissioner's Certificate can set the withholding at the actual tax, including zero. The statute taxes a 'sale or exchange' and its exclusions do not mention Section 1031, so a seller who subdivided a parcel and now wants to exchange the lots should have a CPA compute the land gains tax separately from the federal deferral.

Most investors selling a building they bought whole are outside the tax entirely, since buildings and structures are excluded from the definition of land and the six-year subdivision test is not met.

Nonhomestead education property tax at $1.643 per $100 for FY2027

Every Vermont parcel is nonhomestead unless the owner files a homestead declaration (Form HS-122) by April 15, and property leased for more than 182 days of the year, second homes and camps are nonhomestead by definition. The Legislature set the FY2027 statewide nonhomestead education rate at $1.643 per $100 of value, adjusted in each town by the common level of appraisal and the statewide adjustment; the Department's example town with a 90 percent CLA and a 70 percent statewide adjustment lands at $1.2779.

Rentals therefore pay the statewide rate regardless of local school spending, while homestead rates vary with the district. A buyer of Vermont replacement property should budget the nonhomestead rate plus the municipal rate, and should not expect a purchase to reset the listed value, which moves with town-wide reappraisals and the CLA rather than with the sale.