Vermont imposes a “Land Gains Tax” on property held by the seller for a period less than six years. The tax is on the land (not the buildings) and was instituted in an effort to discourage the purchase, rapid subdivision and turnover of Vermont real estate. Most would agree that its purpose has been largely served, albeit with certain unintended consequences.
There are several exemptions to the Land Gains Tax, chief among them are:
- Property held for more than six years
- Property that was the primary residence of the seller
- Property (up to 10 acres) that will be the primary residence of the buyer
- Property on which the seller will show no gain
The amount of the tax varies from a high of 80% of the gain on the land (we’ve never seen this amount; it is on property held for less than 4 months and sold at a 200% or more profit) to a low of 5% of the gain on the land.
The rate schedule is available on the Vermont Department of Taxes web site and is based upon three categories of profit (up to 99%, 100% to 199%, and 200% and above) and upon the length of time the property has been held (4 and 8 month increments, and then yearly for years 1 through 5).
As with the Vermont Real Estate Withholding Tax, gain is calculated using the basis of the property (purchase price, expenses of purchase, and capitalized land improvements) subtracted from the sale price less expenses. Depreciation does not figure into the Land Gains calculation (land doesn’t depreciate, well with certain exceptions).
With an all land sale (no buildings) it is easy: take the calculated gain, multiplied by the tax rate (see above) and you have the tax. Again, as with the Real Estate Withholding Tax, the seller usually applies in advance for a Commissioner’s Certificate, which establishes the amount of the tax that must be paid at closing.
If a Commissioner’s Certificate is not obtained in advance of closing, the buyer is required to withhold 10% of the value of the land from the seller at closing, and remit to the state. The seller may attempt to get some or all of it back by making a post-closing filing.
The sale of land with buildings is a bit more involved.
If a condominium is being sold, the state has determined that 10% of the purchase price of a condominium is attributable to the land. In such a case, the gain is determined (let’s say $50,000.00) and 10% of that ($5,000.00) is assigned to the land. If the condo was held for 3 years but less than 4, and the profit is less than 100%, the tax is 15% (according to the schedule) or $750.00. While I realize it is all relative, you can see that the Land Gains tax in the sale of a condominium is rarely of major consequence.
Sale of a house and land requires a bit more research. It used to be that the state generally assigned (depending upon the size and location of the property) a determined value to a house and land, 25% land value was typical. That has changed, now it is necessary to obtain the assessors card from the town where the property is located, and to ascertain from that how the town has assessed the relative value of land vs. buildings. If that value allocation came in at say, 30% land, 70% buildings, using the $50,000.00 profit figure from the condominium example above, the Land Gains tax now becomes $50,000.00 x 30% = $15,000.00 x 15% (less than 100% profit, held for 3 years but less than 4) or $2,250.00.
Land Gains taxes paid at closing can be steep, so it is critical that sellers be aware of the numbers prior to entering into a purchase and sale contract.
Purchasers need to be aware of the existence of the tax because if the tax is not paid or withheld at the time of closing, the property is subject to a lien for the amount of the tax and the Purchaser (unfairly) can be made responsible.