In Vermont, a real estate withholding tax is imposed on non-resident property sellers to ensure that the state collects any income tax owed on the gain from the sale of the property. This withholding tax is typically calculated at 2.5% of the sale price and is due at the time of the sale.

The non-resident seller must then prepare and file a Vermont income tax return by April 15^th of the following year (plus extensions) to determine the state capital gains tax due. The amount withheld at closing is then applied to the tax due. If the tax due is less than the amount withheld, the non-resident seller will receive a refund for the difference. If the tax due is more than the amount withheld, the non-resident seller will need to pay the remaining balance after receiving credit for the amount withheld.

The buyer of Vermont real estate is responsible for remitting the withholding tax to the State tax department at the time of closing. The failure of the buyer to remit the withholding tax will result in the State having a lien against the property, so it’s important from the buyer’s point of view to be sure the withholding tax is paid. The attorneys involved with the closing will typically prepare the appropriate withholding tax forms and coordinate the payment to the State.

A nonresident individual is one who is domiciled outside of the State of Vermont at the time of closing.  A partnership, a limited liability company, or a Sub chapter 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.

If any of the sellers are nonresidents, then the whole sale is subject to withholding.

The obligation to pay withholding tax can be reduced or eliminated in certain circumstances by obtaining a Commissioner’s Certificate prior to closing. The following are possible reasons for reduced or eliminated withholding:

-The property is being sold at a loss;

-An early determination of the tax due shows it will be less than 2.5% of the sale price;

-The sale qualifies for federal exclusion of gain for the sale of a primary residence;

-The property is part of a 1031 like kind exchange;

-Some of the sellers are Vermont residents or domestic entities; and

-Any other reason where the gain is not recognized federally.

The attorney for the non-resident seller can assist with an application for a Commissioner’s Certificate of reduced or eliminated withholding.