What Buyers and Sellers Should Know
When real estate is sold in Vermont, state income tax is due on the gain from the sale, whether the seller is a resident, part-year resident, or nonresident. If the seller is a nonresident, the buyer is required to withhold 2.5% of the consideration paid or to be paid for the real property and remit it to the Vermont Department of Taxes.
Buyers are required to file Form RW-171, Vermont Withholding Tax Return for Transfer of Real Property, with their remittance, unless a Commissioner’s Certificate has been obtained by the seller exempting them from withholding. This form must be filed within 30 days of the transfer:
Vermont Department of Taxes
133 State Street
Montpelier, VT 05633
Please note: The buyer does not file this return with the town clerk.
When filing your Vermont Income Tax Return, sellers will want to indicate the Vermont Real Estate Withholding amount as a credit on Line 31e, VT Real Estate Withholding, of the Payments and Credits section. The amount is shown on Schedule A, Line 12, on form RW-171, the Vermont Withholding Tax Return for Transfer of Real Property, which the buyer must complete and submit. The seller must also include a copy of the first two pages of the federal income tax return and any federal schedule that documents the income or loss from the Vermont sale.
It is the practice of the Department of Taxes to allocate real estate withholding in proportion to each seller’s share of the proceeds. If the seller claims a credit of Vermont real estate withholding on the Vermont Income Tax Return that is not proportionate to the seller’s share of the proceeds as reported on the federal Income Tax Return, the Department may adjust the amount of real estate withholding claimed on the Vermont Income Tax Return. If the seller believes he or she is entitled to claim real estate withholding in an amount that is not proportionate to seller’s share of the proceeds, then supporting documentation should be provided.
A seller has two options to file and remit the income tax on the capital gains realized on a sale paid in installments. The seller may choose to pay the tax each year until the installment is complete or the seller may elect for Vermont purposes to report the entire gain in the year of sale and pay 6% of the entire capital gain. If the seller chooses the 6% tax, the seller should include a letter with the return asking for 6% Tax Elect Out for Vermont Purposes and attach a copy of Federal Form 6252. The seller should not include the gain from the sale on Schedule IN-113, Income Adjustment Calculations Line 7. If the seller does not make this election the real estate withholding will be retained by the Department and applied as a credit against the seller’s tax liability in each year that an installment is received.
If two or more persons are joint buyers, each buyer is required to withhold. However, if one of the buyers withholds and remits the required tax to the Department, then the obligation of all buyers is met. If the buyer is a corporation, limited liability company, partnership, or fiduciary, it is also obligated to withhold and remit the tax.
Definition of Nonresident
A nonresident individual is one who is domiciled outside the State of Vermont at the time of closing. A partnership, a limited liability company, or a Sub chapter S Corporation is a nonresident of Vermont if the controlling interest is held by nonresidents. A corporation (other than a Subchapter S Corporation) which was incorporated outside Vermont is a nonresident unless it has its principal place of business in Vermont and does no business in the state of incorporation.
If any of the sellers are a nonresident then the whole sale is subject to withholding unless the sellers have obtained a Commissioner’s Certificate exempting the Vermont residents.
Exemptions from Real Estate Withholding
Sellers may request the Department review the transaction to see if the seller qualifies for a Commissioner’s Certificate to reduce or exempt the seller from the withholding. A Vermont Income Tax Return must be filed within the time prescribed for filing the federal income tax return. Any tax liability in excess of withholding must be paid by the seller with the return. Any excess withholding will be refunded to the seller by the Department.