The Vermont capital gains tax on real estate is not a separate rate. Profit from selling Vermont real estate is added to your adjusted gross income and taxed at the state’s graduated income tax rates, which run from 3.35% up to 8.75%. Vermont allows only a $5,000 exclusion on gains from a home sale, so for most sellers the meaningful tax breaks come from the federal side. Sellers who subdivided land within the last six years face an additional land gains tax, and non-residents have 2.5% of the sale price withheld at closing.
How Vermont Taxes the Gain
Vermont has no preferential capital gains rate. Whatever you clear on the sale flows through your Vermont return as ordinary income, taxed at the same 3.35% to 8.75% brackets that apply to wages.
Under 32 V.S.A. § 5811(21), you can pick one of two exclusions each year, whichever gives you the bigger break:
- A flat $5,000 exclusion off your net capital gain. This one applies to any capital gain, including gain from selling a home, a second home, or investment real estate.
- A 40% exclusion of net capital gain on assets held longer than three years, capped at the lesser of 40% of federal taxable income or $350,000.
The 40% option is the one that catches people out. Residential real estate is specifically disqualified. A primary residence, a vacation cabin, a ski condo, or any land that was part of a residential parcel at the time of sale does not qualify.1Legal Information Institute. Vermont Code 10-041 – Capital Gains Exclusion The 40% exclusion was written for business and investment assets: commercial buildings, apartment buildings, raw land held for appreciation, farmland, and timber property.2Vermont General Assembly. Vermont Code 32 VSA 5811 – Definitions You cannot combine the two exclusions in the same year.
The practical result for homeowners: if you clear $200,000 on your house, Vermont taxes $195,000 of it as ordinary income. That is why the federal primary residence exclusion, covered next, does most of the work for home sellers.
Federal Capital Gains Tax on Top
The federal bill is usually the larger of the two. If you owned the property more than a year, the gain qualifies for long-term capital gains rates. For 2026 those rates are:
- 0% on taxable income up to $49,450 (single) or $98,900 (married filing jointly)
- 15% from there up to $545,500 (single) or $613,700 (married filing jointly)
- 20% above those thresholds
Property held a year or less is taxed at your ordinary federal rates, which top out at 37%.
The Section 121 Home Sale Exclusion
The single most valuable break for home sellers is the federal exclusion under IRC Section 121. If the property was your primary residence for at least two of the five years before the sale, you can exclude up to $250,000 of gain, or up to $500,000 for a married couple filing jointly where both spouses meet the use test and at least one meets the ownership test.3Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence The two years do not have to be consecutive.
Sellers who fall short of two years because of a job move, a health issue, or another unforeseen circumstance can take a prorated exclusion. Twelve months of qualifying use gets you half the full amount. Vermont has nothing comparable, which is why the federal exclusion is where home sellers save real money.
The 3.8% Net Investment Income Tax
Higher-income sellers owe an additional 3.8% federal surtax on net investment income, including real estate gains. It kicks in when modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), and the 3.8% applies to the lesser of your net investment income or the amount over the threshold.4Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax Gain excluded under Section 121 is not subject to the surtax; anything above the exclusion is.
Depreciation Recapture on Rentals
If you took depreciation deductions on a rental, the federal government recaptures them at sale. The portion of your gain attributable to prior depreciation is taxed at a maximum federal rate of 25%, no matter what long-term rate applies to the rest of the gain. Vermont has no separate recapture rule; the recaptured amount just rolls into your Vermont adjusted gross income and is taxed at ordinary state rates.
The Vermont Land Gains Tax
Separate from the income tax, Vermont imposes a land gains tax on profits from selling land that was purchased and subdivided within the prior six years. It is aimed at short-term subdividers, not ordinary home sellers, and it applies only to the land; buildings are excluded from the calculation.5Vermont General Assembly. Vermont Code 32 VSA 10002 – Land and Residences
“Subdivision” here has a specific meaning: you partitioned a tract for sale or transfer. The subdivision is treated as occurring on the earlier of the first lot being conveyed or a plat or deed being recorded. A boundary adjustment with a neighbor does not count.
How the Rates Work
The rate turns on two variables: how long you held the land, and how large your gain was relative to your basis. The full schedule under 32 V.S.A. § 10003 runs from 5% at the low end (held five to six years, small gain) up to 80% at the high end (held less than four months, gain of 200% or more of basis).6Vermont General Assembly. Vermont Code 32 VSA 10003 – Tax Rates Once you cross the six-year mark, the land gains tax no longer applies at all. A flat rate from the schedule applies to the entire gain, with the gain percentage rounded up to the next whole number.
Sellers report the transaction on Form LGT-178 within 30 days of the sale.7Vermont Department of Taxes. Form LGT-178 Instructions The tax operates independently of income tax, so a bad year for your other investments will not offset it.
Who Is Exempt
The important exemption for individual sellers is the principal residence carve-out. Up to 10 acres necessary for use with your home is excluded from the definition of taxable land. Where local zoning requires a larger minimum lot, the exemption stretches to 25 acres. A parallel exemption applies on the buyer side when the purchaser certifies the property will be their Vermont principal residence.
Other exemptions cover transfers of agricultural land between family members (parents, siblings, children, grandparents) when the land stays in farm use, sales of farmland or open space to qualifying conservation organizations, and transfers of conservation or preservation easements to a qualified holder. Gifts, transfers at death, and estate distributions are outside the tax because no sale consideration changes hands.
Non-Resident Withholding at Closing
If you live outside Vermont and sell Vermont real estate, the buyer must withhold 2.5% of the sale price and send it to the Vermont Department of Taxes within 30 days on Form RW-171.8Vermont General Assembly. Vermont Code 32 VSA 5847 – Withholding on Sales or Exchanges of Real Estate9Vermont Department of Taxes. Real Estate Withholding This is a prepayment against your final Vermont income tax, not a separate tax. If your actual liability is lower, you get the difference back when you file. If it is higher, you pay the balance.
Sellers who expect their actual tax to be less than 2.5% of the sale price can apply for a Commissioner’s Certificate for reduced withholding before closing. Buyers who fail to withhold become personally liable for the amount.
Land subject to the land gains tax carries its own 10% withholding on the land portion of the price. A non-resident selling subdivided land can therefore see both withholdings applied at closing.
Property Transfer Tax at Closing
The buyer, not the seller, owes Vermont’s property transfer tax at closing, but the rate structure affects how buyers price offers, so it is worth knowing when you list.10Vermont General Assembly. Vermont Code Chapter 231 – Property Transfer Tax
- Principal residence: 0.5% on the first $200,000, then 1.25% above that.
- Other property: 1.25% of the full purchase price.
- Non-primary residential property (year-round habitable residence that the buyer will not use as a primary home and will not rent out under a landlord certificate): 3.4% of the full purchase price.
A 0.22% clean water surcharge sits on top, except on the first $200,000 of a principal residence purchase.11Vermont Department of Taxes. Property Transfer Tax The 3.4% rate on a $400,000 second home produces a $13,600 tax bill, which shapes what a buyer of a vacation property is willing to offer.
Deferring the Gain With a 1031 Exchange
Sellers of investment or business real estate can defer both federal and Vermont tax by rolling the proceeds into a replacement property through a like-kind exchange under IRC Section 1031. Personal residences do not qualify; the property must be held for business or investment use.12Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use in a Trade or Business or for Investment
Two deadlines govern the exchange and neither one bends. You have 45 days from the sale of the relinquished property to identify replacement candidates in writing. You have 180 days from the sale date (or your tax return due date, whichever comes first) to close on the replacement. Miss either one and the deferral is gone, with no hardship extensions outside a presidentially declared disaster.13Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 Vermont generally follows federal treatment, so a properly completed exchange defers the state tax along with the federal.
FIRPTA if the Seller Is a Foreign Person
Foreign sellers of Vermont real estate face a separate federal withholding under FIRPTA. The buyer must withhold 15% of the amount realized and remit it to the IRS.14Internal Revenue Service. FIRPTA Withholding That is on top of Vermont’s 2.5% non-resident withholding, so a foreign seller can see 17.5% or more of the price held back at closing before anyone calculates actual tax. Both amounts function as credits against final liability, with any overage refunded after returns are filed.