Vermont Land Gains Tax: Why Only Vermont-for-Vermont Exchanges Escape It

Since 2020 the tax reaches only land you subdivided within six years of buying it

32 V.S.A. section 10002 defines "land" for this tax as land "that has been purchased and subdivided by the transferor within the six years prior to the sale or exchange of the land." Subdivision means dividing a tract for sale or transfer and is deemed to occur on the conveyance of the first lot or the filing of a plat, plan or deed in the town records, whichever comes first; a boundary adjustment does not count. Buildings are excluded, as is up to 10 acres under the seller's principal residence.

This narrower definition came from Act 71 of 2019, which the Department of Taxes' 2019 legislative summary describes as limiting the tax to land "subdivided by the transferor within six years of purchase" from January 1, 2020. Land in a designated downtown, village center, growth center or new town center is excluded, along with conservation, certain farm and affordable housing transfers.

A rental house, an apartment building or a parcel sold as it was bought is therefore outside the tax even after one year of ownership, and section 10006(d) says that where the property is not "land" under section 10002(a) nobody has to pay, file or withhold. Where it is land but another exclusion is claimed, the return and the withholding are still required.

The rate is set by holding period and by gain as a percentage of basis

32 V.S.A. section 10003 is a grid. The columns are gain of 0% to 99% of basis, 100% to 199%, and 200% or more. Land held under four months pays 60%, 70% or 80% of the gain; four to eight months 35%, 52.5% or 70%; eight months to a year 30%, 45% or 60%; one to two years 25%, 37.5% or 50%; two to three years 20%, 30% or 40%; three to four years 15%, 22.5% or 30%; four to five years 10%, 15% or 20%; and five years but less than six 5%, 7.5% or 10%. "A single flat rate of tax shall apply to all of the gain."

Section 10005 borrows federal rules for basis and holding period, including tacking, and defines the amount realized as the full consideration including liens left on the land, less reasonable expenses of sale and commissions, capped at 12% of the gross if you owned the land under a year. Where a sale includes buildings, the amount realized is allocated between land and buildings by fair market value and only the land share is taxed. Losses elsewhere cannot offset the gain.

A 1031 exchange escapes the tax only if the replacement is Vermont land

Section 10005(c) provides that "no gain shall be recognized in cases where gain is not recognized under Title 26 of the U.S. Code." The Department's Land Gains Regulations at Reg. section 1.10005(c)-1 list the federal nonrecognition sections that carry over, including section 1031, "only to the extent to which there is actual nonrecognition of gain." Boot you recognize federally is gain Vermont taxes too.

Reg. section 1.10005(c)-3, titled Investment in Non-Vermont Land, narrows the door: the federal nonrecognition "will not apply in instances where Vermont land is exchanged for non-Vermont land or where proceeds of sale or conversion are used to invest in non-Vermont land." Federal law lets you swap a Vermont lot for an Arizona warehouse; Vermont assesses land gains tax on the lot as if sold for cash.

That reaches the client's products. A Delaware statutory trust whose real estate sits outside Vermont is non-Vermont land for this purpose, so proceeds placed in a traditional DST keep the federal deferral and lose the Vermont one. For subdivided land sold inside a year or two the land gains column can be the larger number, so settle the replacement geography before you sign the contract, not after day 45.

The buyer withholds 10% unless a certificate says otherwise, and you file within 30 days

Section 10007 requires the buyer of land held by the seller under six years to withhold 10% of all consideration, including each instalment on an instalment sale, and remit it on Form LGT-177. Within 30 days of the sale the seller files Form LGT-178 showing the tax and the withholding and pays the balance or claims a refund, which the statute requires within 45 days. The LGT-178 instructions carry the rate table.

A Commissioner's Certificate can reduce the withholding before closing. The Department's certificate page lists the grounds it accepts, among them a loss, a tax lower than the withholding, and that the "transaction is part of a section 1031 exchange agreement." It does not replace the return: the land gains page says the certificate "does not take the place of filing."

Because an exchange into non-Vermont land is taxed, a certificate request for a 1031 should say where the replacement will be. If that is undecided at closing, expect the full 10% to be withheld and recovered through the return once the exchange completes into Vermont land; if it completes elsewhere, the withholding becomes a deposit on the tax.

The property transfer tax is separate and has no exchange exemption

Every deed also carries the property transfer tax under 32 V.S.A. section 9602: 1.25% of the value transferred, or 0.5% on the first $200,000 of a buyer's principal residence, and since August 1, 2024 3.4% on year-round habitable residential property that will not be the buyer's principal residence and needs no landlord certificate. Section 9602a adds a 0.22% clean water surcharge and section 9604 places the tax on the transferee unless the parties agree otherwise. The section 9603 exemptions cover mere changes of form, family transfers, mergers and section 351 formations, not like-kind exchanges.

A hypothetical with round figures: you bought 40 acres for $200,000 three and a half years ago, subdivided it, and sell one lot with an allocated basis of $50,000 for $150,000, paying $9,000 in commissions. The amount realized is $141,000 and the gain $91,000, which is 182% of basis, so the three-to-four-year row and the 100% to 199% column give 22.5%: $20,475. The buyer withholds $15,000 and you pay $5,475 with the LGT-178. Exchange the lot for other Vermont land with no boot and the tax is zero; exchange it for New Hampshire land and the full $20,475 stands. Run your own numbers with your CPA.