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 generous 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.
For many years, Vermont
income taxes were calculated as a percentage of federal income liability.
But beginning in 2002, the state dropped the so-called “piggy-back” system
and enacted its own rate schedule, which currently has five brackets:
3.6%, 7.2%, 8.5%, 9.0%, and 9.5%.
For real estate held a year
or less and sold for a gain, the Vermont tax is at the seller’s regular
tax rate. Long-term capital gains, which generally means assets held
longer than one year, qualify for a 40% exclusion from Vermont’s income
tax, with the balance taxed at the seller’s regular rate.
In early 2004, Gov. Jim
Douglas proposed eliminating the 40% exclusion, but he was rebuffed by the
Legislature. Therefore, long-term gains from the sale of land, vacation
homes and investment property still qualify for the 40% exclusion.
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.
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