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.
What buyers must do to withhold and remit the tax
Buyers are required to file form RW-171, Vermont Withholding Tax Return for Transfer of Real Property, with their remittance. This form must be filed within 30 days of the transfer with the Vermont Department of Taxes, 133 State St., Montpelier, VT 05633.
Please note: The buyer does not file this return with the town clerk.
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 Vermont Department of Taxes, 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.
Definitions 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 Subchapter 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.
Exemptions from Real Estate Withholding
Exemptions from Vermont Real Estate Withholding may apply. The exemptions are listed in the instructions for Form RW-171, available on the Vermont Department of Taxes website. If this transfer qualifies for an exemption, check the appropriate box on the Withholding Certification section of the Property Transfer Tax Return, which may be filed online through the ePTTR service located on the Department of Taxes website. 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 of Taxes.
What sellers should do when filing the Vermont Income Tax Return
When filing the 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.
Please note: The seller may obtain a copy of form RW-171 from the buyer at the real estate closing.
Each Seller’s Share of the Proceeds
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.
When Payments Are Made in Installments
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, Line 7.
For further information and assistance, please call (802) 828-5860.