There are various taxes connected with the sale of real property in Vermont.
Taxes that are related to real estate transactions are Property Transfer Tax, Land Gains, and Real Estate Withholding. This page provides an overview of real estate property taxes, those that are due annually and which are based upon the assessed value of the property.
The most common concern, for both buyers and sellers, at the time of a property transaction is the property tax pro-ration.
In Vermont, property taxes are paid directly to the municipality, and the municipality forwards the school portion of the tax (see below) to the state.
In Warren, Fayston and Moretown, taxes are due in one, lump sum, annual installment, usually the first week in November. In Waitsfield, taxes are due in four installments, one-quarter each in September, November, February and May. Although the tax bill for the three lump sum towns indicates that the taxes are due earlier, usually in August, there is no penalty as long as they are paid by the above dates, and, as you may guess, most taxes are not paid until shortly before the delinquent date.
The fiscal year for the school taxes in all of Vermont runs from July 1 to June 30. In The Valley, except for Waitsfield the fiscal year for the municipal taxes runs from January 1 to December 31. In Waitsfield, the fiscal years for both municipal and school runs from July 1 to June 30. This results in a split tax pro-ration at the time of closing for all towns except Waitsfield.
Because the school taxes are, for the most part, paid in advance, the school tax pro-ration at the time of closing usually results in a debit to the purchaser and a credit to the seller. Since the municipal taxes are, for the most part, paid in arrears, the municipal tax pro-ration usually results in a (much smaller) debit to the seller and credit to the purchaser.
Here is one example.
The total property tax bill is $7,000.00. Of that amount $1000.00 is for municipal tax and $6,000.00 is for school tax.
The closing is February 1, the taxes have been paid in full.
The purchaser will owe the seller pro-rated school tax for the period from February 1 (by statute, the seller gets credit for the day of closing) to June 30. The per diem school tax is calculated as $6,000.00 / 365 = $16.43. The number of days between February 1 and June 30 (non-leap year) is 150. Accordingly, purchaser owes seller $16.43 x 150 or $2,465.75 for school tax.
The seller will owe the purchaser pro-rated municipal tax for the period January 1 to January 31. The per diem municipal tax is calculated as $1,000.00 / 365 = $2.739. Seller owes 31 days at $2.739 or $84.90 for municipal tax.
Obviously, there are countless variations that may apply (well, not countless, actually there would be 364 variations). If, for example, closing was in July or August, and the taxes have not yet been paid, the seller will owe the purchaser for a month or two in school tax and for seven or eight months in municipal tax. (In this example, however, the purchaser will then have to come up with the entire tax due in October).
Note: In most towns, the tax bill will be sent only to the person who owned the property on April 1 in a given year. It is the purchaser’s responsibility to obtain a copy of the tax bill from the town, and to pay it when due. If the bill has been issued, the purchaser’s attorney will provide her with a copy at closing. Once the property is in your name as of the first April 1st following closing, the bill for that year will be mailed directly to you.
Note: In 2007, the state further complicated closing time tax pro-rations. As discussed below, most Vermont residents are eligible for a credit against property taxes based upon an income sensitized formula. It used to be that the eligible taxpayer would get a check from the state for that credit around the time the taxes were due. In an effort to be sure the taxpayer associated the check from the state with the fact that its purpose was to offset property tax obligations, the credit now shows up directly on the property tax bill, rather than in the mailbox. Most attorneys take the position that this credit is the property of the seller and the common practice is to credit the seller with that credit at the time of closing. Depending, in part, upon the time of year the closing takes place, this credit to the seller of the tax credit can result in substantial additional amounts of money due from the purchaser at the time of closing (although it is true that the amounts paid to the seller for the tax credit are amounts that would eventually have been due from the purchaser when the tax bill was paid).
Further, the procedure of deducting the tax credits directly from the tax bills can cause substantial confusion with purchasers who have established escrow accounts with their lender for payment of the taxes. Caution: when considering a purchase, be sure the taxes said to apply to a particular property are the actual taxes fully calculated and not as adjusted based upon the tax credits due the seller.
In Vermont, property values are assessed by the municipality. A Board of Listers makes the value determination. Tax rates are then set annually by the municipality for local purposes (primarily road construction and maintenance) and by the state for education purposes. The state education tax is by far the larger of the two; in most Valley area towns, education tax accounts for about 85% of the overall tax bill.
While there is a different tax rate for Vermont residents than for non-residents, on the face of it, the difference is very small and in some towns (Waitsfield and Fayston, for example) the residential rate is actually higher than the non-residential rate. The more important property tax benefit for Vermonters is found in an income sensitivity formula that reduces property taxes for residents with household incomes of less than $147,500 (calendar year 2017). About 70% of Vermont property taxpayers qualify for a property tax reduction based upon this formula. The reductions range from under $100.00 to a maximum of $8,000.00.
Town-wide reassessments are conducted periodically and are mandated by the state once assessed values fall below about 80% of what the state considers to be fair market value.
The sale of a property does not trigger a reassessment of the property. Obtaining a building permit often does trigger a visit by the assessor and a commensurate increase in property taxes. The increase, however, will be (or at least is supposed to be) in line with town values so that if, for example, the town has not reassessed in the last eight years your new deck should not cause the assessed value of the entire property to jump to today’s market value. A market value will be determined, but then will be reduced to the “common level of assessment” then operative in the involved town. For example, if the common level of assessment (which is set by the state) indicates that the current town assessed values are actually only 80% of the fair market value, the assessment triggered by the permit for the new deck will be made, but then reduced to the 80% level.
Town-wide reassessments are not, necessarily, a horrible event. Actual taxes often increase little, and some may actually decrease as a result of the reassessment. The reason is that as all properties are raised to “current market value”, the actual tax rates are decreased such that the amount of money raised is roughly the same.