Real Estate Withholding Tax

In Vermont, sellers of real property who are not residents of the state are subject to a real estate withholding tax, collected at the time of closing.

The amount of the tax is 2.5% of the gross sale price, e.g., with a contract sale price of $250,000.00, the withholding tax is $6,250.00.

The policy behind this tax is to allow the state to grab a portion of the seller’s proceeds before they leave so as to ensure that the Vermont gains tax gets paid.

The tax is paid by the seller but by statute, it is the responsibility of the purchaser (usually through their attorney) to collect the tax and remit it to the state. The attorney for the Vermont purchaser will see that the appropriate amount is collected at closing.

It is possible, and more often than not it happens, that the 2.5% is reduced prior to closing. If the seller demonstrates that the actual capital gains tax (really income tax as Vermont does not have a specified capital gains rate) due to Vermont will be less than the 2.5% arbitrary figure, the Vermont Department of Taxes will issue a Certificate of Reduced Withholding which indicates such lesser amount as the state will accept.

A Certificate is obtained by making a filing with the state prior to closing. It can take several days after filing the application to obtain a Certificate. Due to the processing time, it is common that at closing the 2.5% is held by the attorney or the Buyer’s attorney in escrow until the Commissioner’s Certificate is issued.

We will ask the Seller to provide necessary information for the application. In essence, it is a worksheet to calculate the net gain the seller will show as a result of the sale; purchase price plus expenses of purchase, plus capitalized improvements, subtracted from sale price less expenses of sale….like that.

The other element in this calculation is depreciation. If the seller has placed the property in service as rental property or used it for trade or business or the production of income, the tax department will treat it as depreciated for the years that it was rented or otherwise used for business. (Note: they will treat it as depreciated, even if the seller did not, in fact, claim the depreciation on their federal tax filings, we assume on the theory that you can go back and amend the return within the time allowed.) The amount of any depreciation will reduce the seller’s basis and increase the taxable gain.

The people at the tax department will generally accept a summary of any capital improvements listing the nature of the work done and the cost, receipts and such are not required. However, receipts would be important if a tax payer were subject to an audit.

Once the gain is calculated, the state will estimate the Vermont tax at up to 9% of that gain as the probable tax. In our example, let’s say the seller paid $150,000.00 for the property that is now being sold for $250,000.00. The face amount of the gain $100,000.00, is reduced by the transfer tax at purchase, the real estate commission at sale, a few capital improvements, and, of course, the all important legal fees at both ends resulting in a net gain of $78,875.00. The withholding tax on this amount will be $78,875.00 x 9% or $7,098.75 (using the maximum 9% tax figure), which is more than the straight 2.5% withholding calculation – in which case we’d just withhold the 2.5% or $6,250.00.

The 9% figure is the approximate amount of the Vermont tax. The actual Vermont tax rate on the gain is based upon a formula including several elements (mostly the Seller’s federal tax bracket).

The seller will then be expected to file a Vermont tax return for the year of sale showing the gain from the sale of the Vermont property. If the withholding at closing was excessive, there will be a refund, if the withholding was insufficient, the seller will have to pay the difference.