Vermont Capital Gains Tax on Real Estate

By Skyline Capital Investments · Updated October 26, 2026 · 7 min read

Does Vermont have a capital gains tax?

Yes, through its personal income tax. Vermont taxes capital gains as income at four rates, 3.35%, 6.6%, 7.6% and 8.75%, under 32 V.S.A. section 5822, with bracket amounts indexed for inflation each year. On a building sale, nearly all of the taxable gain ends up in the 8.75% bracket.

What sets Vermont apart is the capital gains exclusion. A seller can subtract either the first $5,000 of gain or 40% of the gain from assets held more than three years, capped at $350,000. Rental real estate held long enough qualifies for the 40% option, so on a large apartment sale Vermont taxes noticeably less than the full gain.

How the Vermont capital gains exclusion works

Under 32 V.S.A. section 5811(21)(B)(ii), you choose one of two methods. The flat method excludes up to $5,000 of adjusted net capital gain. The percentage method excludes 40% of adjusted net capital gain from assets held more than three years. Either way, the exclusion cannot exceed 40% of your federal taxable income or $350,000, whichever is less. At 40%, the $350,000 cap is reached at $875,000 of qualifying gain.

Some gains are shut out of the 40% method even if held more than three years. The statute lists real estate you used as your primary or nonprimary residence, depreciable personal property other than farm property and standing timber, and publicly traded stocks and bonds. An apartment building you rented out and did not live in is not on that list. The exclusion is claimed on Schedule IN-153, and no exclusion is allowed in a year you report a net capital loss.

Why depreciation recapture gets no exclusion

Vermont defines the gain eligible for its exclusion as adjusted net capital gain income under 26 U.S.C. section 1(h). That federal definition leaves out unrecaptured Section 1250 gain, which is the part of your gain equal to the depreciation you took. So in Vermont, recapture is taxed in full at ordinary rates, while only the remaining long-term gain gets the 40% exclusion.

Vermont also does not follow federal bonus depreciation. Section 5811(21)(A)(iii) adds back any bonus depreciation taken under Internal Revenue Code section 168(k), and a separate subtraction allows the depreciation you would have had without it. After a cost segregation study, your Vermont basis and recapture can differ from the federal numbers, so ask your CPA for the Vermont depreciation schedule.

How Vermont and federal capital gains tax stack

The two taxes are figured separately and added. Federally, long-term gain is taxed at 0%, 15% or 20%, and Revenue Procedure 2025-32 puts the 2026 start of the 20% rate at $613,700 of taxable income for joint filers and $545,500 for single filers. Unrecaptured Section 1250 gain is taxed at up to 25%. The 3.8% net investment income tax applies once modified adjusted gross income passes $250,000 joint or $200,000 single, unless the rental is part of a real estate professional’s business.

Vermont then applies its own rates to the gain left after the exclusion. One more Vermont rule can matter: if your federal adjusted gross income exceeds $150,000, your Vermont tax is the greater of the bracket tax or 3% of federal AGI (32 V.S.A. section 5822(a)(6)). On a large sale taxed mostly at 8.75%, the bracket tax is usually the larger figure.

Vermont withholding when a nonresident sells

When a nonresident sells Vermont real property, the buyer must withhold 2.5% of the price and send it to the Department of Taxes with Form RW-171 within 30 days (32 V.S.A. section 5847). A buyer who fails to withhold is personally liable for the tax. Individuals, trusts, partnerships and corporations can all be nonresidents, and a partnership, LLC or S corporation is a nonresident if nonresidents hold its controlling interest.

If any seller on the deed is a nonresident, the department treats the whole sale as subject to withholding unless the sellers get a certificate. The seller claims the amount as a credit on Form IN-111.

• No withholding if the seller certifies Vermont residency under penalty of perjury.
• No withholding if the Commissioner certifies that no tax is due on the gain or that the tax is paid or secured, and the Commissioner can certify a lower amount on request.
• No withholding on a deed to a lender in foreclosure, or in lieu of foreclosure, with no added consideration.
• Installment sellers can elect to report the whole gain in the year of sale and pay 6% of it.

Vermont land gains tax

Vermont’s land gains tax applies to the gain on land that the seller bought and subdivided within the six years before the sale, under 32 V.S.A. chapter 236. Buildings and other structures are not included in the definition of land, so a long-held apartment building is rarely affected. It matters if you split off a vacant lot or sell newly subdivided land with the building.

Where it applies, the rate runs from 5% to 80% of the gain, depending on how long the land was held and how large the gain is compared with basis. Unless the seller pays in advance or has a Commissioner’s certificate, the buyer withholds 10% of the consideration, and returns are due within 30 days of the sale.

Vermont property transfer tax on the sale

Vermont also taxes the transfer itself. Under 32 V.S.A. section 9602, the property transfer tax is 1.25% of the value of most property, and the Department of Taxes adds a 0.22% clean water surcharge, so a sale of rental property is generally taxed at 1.47%. On a $2,000,000 apartment building, that is $29,400.

Lower rates apply to a buyer’s principal residence, and a 3.4% rate, or 3.62% with the surcharge, applies to year-round homes that will not be the buyer’s principal residence and are not long-term rentals. The Department of Taxes applies the general rate to a long-term rental, so an apartment building bought to rent out falls under it. Whoever bears it under your contract, the transfer tax affects the price a buyer can pay, so factor it in when you compare offers.

Ways Vermont sellers reduce the tax

• Hold the building more than three years before closing, so the 40% exclusion is available.
• Keep records of capital improvements, which raise basis and cut gain at 8.75% plus the federal rate.
• Consider an installment sale. Vermont applies withholding as a credit as payments come in, unless you elect to report the whole gain in the year of sale and pay 6% of it.
• Use a 1031 exchange when you plan to keep your money in real estate rather than take cash out.
• Holding until death gives heirs a stepped-up basis for federal and Vermont purposes.

Worked example: selling a $2M apartment building in Vermont

A married couple filing jointly sells an 18-unit building in Burlington that they have owned for 15 years, for $2,000,000, and pays $120,000 in selling costs. They bought it for $1,000,000 and claimed $300,000 of depreciation, so their adjusted basis is $700,000 and their gain is $1,180,000: $300,000 of unrecaptured Section 1250 gain and $880,000 of long-term capital gain. They have $400,000 of other taxable income, above where the 8.75% Vermont bracket starts, and their MAGI is already over the NIIT threshold. The building carries an $880,000 loan, so they net $1,000,000 in cash before tax.

Federal tax: $300,000 at the 25% maximum is $75,000. The $880,000 capital gain sits above $700,000 of other income and recapture, past the $613,700 line, so it is taxed at 20%, or $176,000. The 3.8% NIIT on $1,180,000 is $44,840. Federal total: $295,840.

Vermont tax: 40% of the $880,000 qualifying gain is $352,000, which the $350,000 cap trims to $350,000 (40% of their federal taxable income would allow far more). That leaves $830,000 taxed at 8.75%, or $72,625. Without the exclusion the Vermont tax would be $103,250. Combined tax is $368,465, about 31% of the gain.

The same sale by a nonresident seller

If the couple lived in New York and held the building in their own names, the buyer would withhold $50,000, which is 2.5% of $2,000,000. They would still owe Vermont about $72,625 on the Vermont-source gain, file a Vermont nonresident return and claim the $50,000 as a credit. Their estimated Vermont tax is above the withholding, so asking the Commissioner for a lower amount would not help here.

How a 1031 exchange changes the Vermont tax

A valid 1031 exchange defers Vermont tax as well as federal tax, because Vermont starts from federal adjusted gross income and adopts federal tax law as in effect on December 31, 2025 (32 V.S.A. section 5824). In the example, reinvesting all $1,000,000 of net cash, after repaying an $880,000 loan, into a replacement of at least $1,880,000 would defer the full $368,465.

There is a trade-off to weigh. The 40% exclusion is a permanent reduction, while an exchange is a deferral. A seller with a long hold, a large gain and no plan to keep reinvesting may find that selling outright and taking the exclusion beats deferring. Our page on the 1031 exchange in Vermont covers withholding on an exchange. The capital gains tax calculator runs the federal side for your own figures.

Selling a Vermont apartment building

Skyline buys apartment buildings with five or more units in Vermont, from Burlington and South Burlington to Rutland, Montpelier and Brattleboro. We buy directly, close on your timeline, and can work inside 1031 deadlines. If the timing of the three-year holding period matters to you, we can set a closing date that fits.

For tenant rules a buyer inherits, see Vermont landlord-tenant law for apartment owners, and for the annual carrying cost, our page on the property tax rate in Vermont.