A Special Report On Vermont Real Estate Taxes

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Introduction

Buying, owning, and selling Vermont real estate all involve a variety of unique state and local laws and taxes, many of which are discussed periodically in regular editions of Vermont Property Owners Report.

This supplement to VPOR is designed to summarize those state and local taxes which pertain to Vermont property. For buyers, the chief tax when purchasing is the property transfer tax, described on below.

For sellers (and for buyers who want to know what they will face when they eventually sell), the most relevant state taxes are the state capital gains tax, the nonresident withholding tax, and the land gains tax. Sellers should understand that gains on the sale of land, vacation homes and investment real estate are almost always taxable by Vermont, even if the seller lives out of state.

A significant cost of owning Vermont real estate is the property tax, made up of the local municipal tax and state and local school taxes.

We table (click to see link to pdf above) which shows 2009 effective property tax rates by town. The effective rates shown are the total combined school and municipal property tax rates for both “homestead” properties and “nonresidential” properties. The school property tax in Vermont changed markedly with the passage of Act 60 in 1997, and more recently, with enactment of Act 68 in 2003.

In general, Act 60 made tax changes in two areas. First, in response to a court ruling, it substantially revised the way the state finances its schools. Prior to Act 60, most education costs were funded by local property taxes, with the state kicking in around 30% of total education costs through a formula designed to help towns with less “property wealth.” Per-pupil spending levels and property tax rates varied widely. Act 60 altered this system by creating a statewide property tax on all property to help fund state “block grants,” and a system for local spending above the block grant.

The second major change in Act 60, not required by the courts, provided greater property tax relief for most Vermonters. Specifically, the Legislature significantly reduced school taxes for owners of Vermont primary homes with household incomes under $75,000. The law was later amended to include some but not all households with incomes from $75,000 up to about $88,000. As of 2007, these two income levels were increased to $90,000 and about $106,000.

Act 68 made further changes, including creating different tax rates for homestead and nonresidential properties (defined in pdf table above), and replacing the “pool” system with one that increases the residential tax rate in proportion to the amount of local spending above the block grant.

We hope you enjoy the supplement, and will enjoy our continuing coverage of real estate topics in VPOR. If you have questions about how any of the taxes described in this supplement may apply to your own situation, consult with a knowledgeable accountant or attorney.

Taxes On The Buyer

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Vermont Property Transfer Tax

At present, the tax rate is 1.25% of the sale price of the real estate being sold. Two lower tax rates exist for particular types of property:

1) For property that will be the primary residence of the buyer, the transfer tax is lowered to .5% on the first $100,000 of the sale price, but rises to the regular rate of 1.25% for that portion of the sale price that is above $100,000. Some lower income buyers pay 0% on the first part of the tax.

2) For property that is enrolled in the state’s current use program (a program which reduces property taxes on agricultural and forest land) or for property which is a working farm at the time of the transfer, the transfer tax is lowered to .5% of the entire sale price. Under a bill (H.485) under consideration in the Legislature, the transfer tax on enrolled current use land would rise to 1.25% on April 1, 2010. [Current use land which is “developed” may also be subject to a penalty of 10% or 20% of the fair market value of the property at the time it leaves the program, depending on how long it was in the program. This penalty would also be changed under H. 485.]

The law provides for several exemptions from the tax. Some of these include: a transfer directly to a creditor to secure a debt; a transfer without payment between a husband and wife, parent and child, grandparent and grandchild, or partners in a civil union; and transfers to a corporation, partnership or LLC at the time of formation, if no gain or loss is recognized under the federal tax code.

Usually the property transfer tax form is filled out by the seller’s attorney and signed by the parties at the closing. Note that the tax only applies to real property, so any personal property – such as kitchen appliances, furniture, etc. – is not taxed. The greater the percentage of the total sale price that is allocated to personal property, the lower the property transfer tax will be.

For information on the property transfer tax, call the Vermont Tax Department at 802-828-2542.

Taxes On The Seller

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Vermont Income Tax

Under Vermont’s system, federal rules for calculating basis and gain on the sale of real estate apply, including the generous exclusion from the federal capital gains tax for those selling primary residences.

Specifically, you may exclude $250,000 of gain (or $500,000 if you are married filing jointly) on the sale of a house, if it was your principal residence for two out of five years before the sale. This exclusion can be used more than once, but only for one sale every two years.

For many years, Vermont income taxes were calculated as a percentage of federal income liability. But beginning in 2002, the state dropped the so-called “piggy-back” system and enacted its own rate schedule, which has five brackets, with these rates for 2009: 3.55%, 7%, 8.25%, 8.9%, and 9.4%.

For real estate held a year or less and sold for a gain, the Vermont tax is at the seller’s regular tax rate. Until recently, Vermont excluded 40% of long-term capital gains from Vermont’s income tax. But starting July 1, 2009, long-term capital gains are taxed like ordinary income, with an exclusion for the first $2,500 in annual capital gains.

Vermont still excludes 40% of long-term capital gains of farmers, landowners selling timber, and – through 2010 – gains realized by taxpayers who are 70 and older and who choose this option.

For a nonresident of Vermont selling real estate here, the amount of tax due is calculated by establishing what the Vermont tax would be if the seller’s income were all taxed in Vermont, then charging the same percentage of this figure that the Vermont real estate gain is of the seller’s total income for the year. Any taxes which a nonresident pays to Vermont for a capital gain can usually be used to offset tax liability to the seller’s state of residency, if a tax applies in that state.

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Vermont Real Estate Withholding Tax

When Vermont property is sold by a nonresident of Vermont, the buyer is required to withhold 2.5% of the amount paid for the transfer and transmit this amount to the Vermont Department of Taxes within 30 days of the sale. A “nonresident” includes someone who once lived in a Vermont property as a primary residence but has already begun living in another state or country.

The amount withheld is considered a payment against the Vermont income tax on the funds received by the seller. If no gain occurred or the amount withheld is more than the tax, the seller can get a refund. A buyer who fails to withhold 2.5% of the sales price at the closing is personally liable for the tax.

Withholding from a nonresident is not necessary, or may be in a reduced amount, if before the closing the buyer or seller obtains a certificate from the Commissioner of Taxes. These are available if 1) no tax will be due, 2) the seller or buyer has provided adequate security to cover the tax liability, or 3) reduced withholding is appropriate because the 2.5% amount exceeds the seller’s maximum tax liability.

For more information on the Vermont withholding tax, call the Vermont Tax Department at 802-828-2777.

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Vermont Land Gains Tax

The land gains tax is only imposed on the gain from the sale or exchange of Vermont land that was held less than six years, with several exceptions. It applies in addition to any capital gains income tax that may also be due.

The tax is determined at a flat rate based on the ratio of gain to basis. The tax goes from a high of 80% for gains over 200% on land held less than 4 months to a low of 5% for gains of less than 100% on land held between 5 and 6 years. Property held longer than 6 years is not subject to the tax.

The tax only applies to land, not buildings. Where buildings are present, an allocation of the sale price between the land and the building(s) must be made. The Tax Department prefers to use the allocation of value that is shown on the town listers’ tax assessment card for that property.

Any gain from selling timber or timber rights within six years is not covered by the land gains tax unless the property consists of 300 or more acres of contiguous land. In this case, the gain from any timber sale is counted in the land gains tax calculation, if the underlying land is sold within six years. However, even for lots under 300 acres, logging reduces the basis of the land, and therefore may affect the tax, if you sell within six years.

Under the law, certain types of land are not subject to the land gains tax, including the first 10 acres of land which was part of the principal residence of the seller within one year prior to sale, or which will be occupied as the principal residence of the buyer within one year after the sale (if there is no house on the property, the buyer can take up to two years to build and occupy a primary residence and still qualify for this exclusion).

In addition, Vermont will forgive any land gains tax if the sale of a property is exempt under the federal capital gains exclusion of $250,000 for a single person and $500,000 for a married couple. In this case, the 10-acre limit does not come into play and a house on 100 acres, for example, might be exempted from the land gains tax.

There is also a “builder’s exemption” for up to ten acres of land where a house will be built and sold for use as a primary residence. The house must be started within one year, completed within two years, and sold within three years.

Sales of vacation homes held less than six years and sold for a gain create land gains tax liability on the land’s increase in value, but if a vacation home changes use – from a vacation home to a primary home – then up to ten acres of the land is not subject to the tax.

Unless a certificate is obtained from the Tax Department ahead of time, the buyer must withhold 10% of the purchase price of the land at the time of the transfer, if the property has been held fewer than six years. This amount must be remitted to the Tax Department immediately, along with a land gains withholding tax form.

The seller must file a land gains tax return within 30 days of the transfer, paying any balance of the tax or requesting a refund.

For more information on the land gains tax, call the Vermont Tax Department at 802-828-2550.

Taxes On Holding Vermont Real Estate:
Property Taxes, Act 60, & Act 68

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Vermont Property Taxes

In 1997, the state’s school property tax system was radically overhauled by Act 60, and then was tweaked further in 2003 by Act 68. The former introduced a statewide property tax, and the latter created two separate tax rates, one for residential property and another for nonresidential property.

Although tax rates are still high in the wake of these laws, many property owners are eligible for substantial tax breaks.

Owners of primary residences whose household income is under $90,000 may qualify for greatly reduced school taxes on their home and up to 2 acres. There is a phase-out transition zone which allows some primary homeowners with incomes up to about $106,000 to get partial tax relief.

Primary home owners with incomes under $47,000 may qualify instead for a reduction in their
assessment, and/or a rebate on their total property taxes, including municipal taxes.

In addition, owners of 25 acres or more of farm or forestland may significantly reduce their property taxes by enrolling in the state’s current use program, which levies a penalty if the land is developed. Some smaller parcels qualify if used for agricultural purposes.

For Vermont property owners who don’t qualify for one of these tax breaks – such as owners of primary homes with incomes over $90,000 (or $106,000 in some cases), or owners of vacation homes or land – some comfort can be taken from the fact that property taxes are a deductible expense on federal and state income taxes.

However, this will not help you if you take the standard deduction, or if you are required to calculate your taxes under the federal Alternative Minimum Tax, which excludes property tax deductions.

The property tax system in Vermont consists of two processes: budgeting and listing. Budgeting consists of determining how much the town needs to raise for expenses such as road maintenance. Listing means determining what properties are taxable and what their taxable values should be; “listers” are the town officials who determine those values. Property taxes are assessed on the value of all real property and some business-owned personal property as of April 1 of each year.

Town listers are obligated under law to appraise property at fair market value, though as a practical matter most properties in a rising real estate market are assessed at less than fair market value. Assessing properties is a difficult job under the best of circumstances, and estimating values is sometimes just a well-educated guess.

The listers may legally alter a property’s valuation each year, but normally this is only done when some major change has been made, such as building a garage. Otherwise, the valuation should only change when the town undergoes a complete reappraisal.

Nevertheless, a few listers reportedly do increase the listed value of a recently-sold property to its sale price, a practice which is improper and unfair to the property owner unless all other properties in town are also being reappraised.

For property owners who believe that their property assessment is too high, or that they are not being assessed fairly compared to similar properties in town, Vermont does have a well-established appeal system that starts in the spring with “grievance” hearings before the town listers.

Once a town knows the value of all property in town (called the “grand list”) and how much it needs to raise for municipal expenses, it can set the municipal tax rate. The state sets each town’s homestead and nonresidential school tax rates, with the former depending on the level of local school spending. In the average town, school tax rates are about twice as high as the municipal tax rate.

Property taxes on a particular property are calculated by dividing the listed value by 100 and multiplying that by the combined school and municipal tax rate. Thus a home with a listed value of $100,000, in a town with a total tax rate of $2.00, would pay $2,000 a year in property taxes.

Tax bills are usually sent out in the summer and are due in between one and four installments, depending on the town. In many small towns, the entire tax bill is due in November. Penalties and interest are often levied on late payments.

The only way to compare tax rates among towns is by using the “effective tax rate,” which is a rate calculated as if all properties in town were listed at 100% of fair market value. See the table for effective tax rates by town.

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Act 60 and Act 68

As indicated by the table of property tax rates, however, tax rates still vary from town to town. One reason is that Act 60 (and Act 68) have had little impact on municipal taxes, which vary from one town to the next. Homestead taxes can also vary depending on how much a town votes to spend on education.

The official title of Act 60 is the “Equal Educational Opportunity Act.” The law was enacted in response to a decision by the Vermont Supreme Court in the case of Brigham v. State of Vermont, which held that the state’s system of funding education violated the state Constitution. The court decreed that all children should have access to “substantially equal educational opportunities.”

Act 60 sought to accomplish this through a statewide property tax, which is used to help fund a block grant based on the number of “equalized” pupils in a school district. Act 60 also instituted a complicated funding system for spending above the block, known by opponents as the “shark” pool and by proponents as the “sharing” pool.

The statewide property tax and especially the pool concept proved controversial, and Act 68 was passed in 2003 partly to respond to that controversy. Among other things, the pool was replaced by a simplified system for taxing towns that spend more than the block grant per pupil.

Now if a town decides to spend more than the state block grant per equalized pupil ($8,544 for 2009), the tax bill is raised a proportional amount. In other words, spending 5% more than the block grant means all school tax bills in that town will rise by 5%, an amount known as the local share.

One of the more significant changes in Act 68 was the creation of two tax rates, one for residential property ($0.86 in 2009, plus the local share) and another for nonresidential property ($1.35, with no local share added on). Residential property includes primary homes and the land on which they sit. All other property is considered nonresidential.

In most towns, nonresidential rates are higher than residential rates, but local school budget increases only boost residential rates.

Act 68 did create a mechanism by which statewide property tax rates can be dropped as property values rise. These reductions are usually far less than the increases in tax bills caused by the state’s yearly Common Level of Assessment adjustments, meant to reflect property appreciation.

In other words, the decreased state tax rates have not led to lower tax bills. They have been offset by the CLA adjustment (caused by rising property values) and higher school spending.

Act 60 and Act 68, in addition to boosting revenues to the state by raising taxes in low-tax towns, also raised other taxes to help pay for schools. Most recently, Act 68 raised the sales tax from 5% to 6%, among other things.

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Act 68 Property Taxes In Brief

1) Residential Property rate: Residential properties or “homesteads” – primary residences and all the land they sit on – are taxed at the state residential school rate ($0.86 in 2009), plus the local share, which varies from town to town depending on school spending. The average effective total 2009 residential school tax rate was $1.21.

For properties that qualify for one of the next two rates, any land beyond two acres is still taxed at this residential rate.

2) Housesite Income-Based rate. If the tax would be lower and if the household income is under $90,000 (or $106,000 in some cases), the school tax may be based on a percentage of the household income (1.80%), plus a percentage of the state school tax that varies by town and reflects the degree to which local spending exceeds the state block grant. This rate only applies to a primary residence and up to two acres of land, known as a “housesite.” It includes owner-occupied primary homes, condos and mobile homes.

3) Housesite Assessment reduction. If the tax would be lower and if the housesite property owners’ household income is under $47,000, the housesite may instead pay the residential property school tax bill that would result after reducing the property’s assessment by $15,000.

2) Nonresidential Property rate: These properties pay based on the state’s nonresidential school tax rate ($1.35 in 2009), with no extra amount for local spending. This rate applies to all property not covered in the three options above: land parcels; commercial and industrial property; vacation properties (homes, condos, mobile homes, and camps); and apartments. Nonresidential school tax rates are the same in all towns.

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Income Sensitivity For Vermont Homesteads

Starting in 2007, these income levels were raised. Primary homeowners with incomes up to $90,000 now qualify for the tax break, and some homeowners with household incomes up to $106,000 qualify for a partial tax break.

What constitutes household income? The definition in Act 60 encompasses adjusted gross income (AGI), which is defined in Vermont as federal AGI plus interest from non-Vermont state and local bonds, as well as all sorts of other income, from welfare payments, to social security, to treasury bond income, to gifts over $6,500.

Households covered by this “income sensitivity” provision were not required to pay more than 2% of their prior year’s income toward the statewide portion of their tax bill on their primary home and up to two acres. This was dropped to 1.9% in 2004, 1.85% in 2005, and 1.8% in 2006. This tax rate is increased proportionally to reflect any local school spending above the block grant.

There is an alternative cap to the income cap for those with incomes under $47,000: the amount of school property tax assessed on a primary home and up to two acres if its equalized value were reduced by $15,000. Most Vermont residents fare better with the income cap.

The income-sensitivity provision provides substantial tax relief for many Vermonters. Since 2007, the relief has been delivered via a reduction in the actual tax bill. To qualify, a property owner must own and occupy a home on April 1 and have been a Vermont resident for the prior calendar year.

The income cap is not available for second homes or any other property that is not the primary residence of someone who lives and pays income taxes in Vermont. Vermonters with household incomes over $106,000 are not eligible for any income-based tax break either.

To help clarify the status of each property in the state, Act 68 requires owners of primary residences to file a Homestead Declaration with the state by April 15 each year. Anyone who misses the April 15 deadline is subject to a penalty of 1% of the tax bill (there is a 100% penalty for those who fraudulently claim a property is their homestead when in fact they live elsewhere).

What determines whether a property is in fact the primary residence of the owner?

Among the factors that may be considered by the Tax Department are: “formal and informal statements of the declarant; the declarant's place of employment, place of voter registration, place of issuance of automobile registration and driver's license; previous permanent residency of the declarant; and address listed on federal and state income tax returns filed by the declarant.”

The Tax Department also places a good deal of emphasis on several factors commonly used by all Northeastern states in determining domicile for tax purposes. These include: use, size and value of the home; where the individual spends time during the tax year; the location of family heirlooms or items of sentimental value; how and where the taxpayer earns a living; and where the individual’s minor children attend school.

Location of bank accounts, medical records, and religious or civic organization memberships can also come into play, and of course all Vermont residents must pay the state income tax.

There are few viable strategies for obtaining better tax treatment for a vacation home short of moving in full-time, although taxes could be reduced in some cases by putting ownership in the name of a Vermont-resident adult child, if he or she actually resides in the home.

Vermonters who own both a primary home and a higher-taxed vacation home, and who are already domiciled here, can convert their vacation home to their primary residence, subject to the same domicile rules described above.

In addition to the income sensitivity for school property taxes, Act 60 also continued a pre-existing property tax "rebate" system that covers all property taxes, municipal as well as school.

With this rebate, no taxpayer with a household income of $25,000 to $47,000 has to pay more than 5% of income in combined state and local property taxes on a home and two acres. The cap is even lower for Vermont residents with incomes under $25,000, dropping to 2% under $10,000.

Like the prebate, the rebate is now delivered via a reduction in the actual property tax bill.

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Non-Real-Estate-Related Taxes:
Income, Sales, Rooms and Meals

Personal Income: Vermont’s 2009 income tax rates ranged from 3.55% to to 9.4%, with some adjustments such as the exclusion of income from U.S. Treasury bonds. Most long-term capital gains are now taxed as ordinary income.

Sales and Use Tax: The state sales and use tax is 6%. Although it covers most merchandise sold in the state, the tax does not apply to groceries, or to articles of clothing and shoes.

Rooms and Meals Tax: The state levies a 9% tax on meals and lodging, including on most vacation rentals. There is a 10% tax on alcoholic drinks consumed at bars and restaurants.

With some exceptions, Vermont municipalities do not levy taxes other than the municipal property tax. The following do have an additional 1% tax on sales, rooms, and/or meals: Brattleboro, Dover, Manchester, Middlebury, Rutland Town, So. Burlington, Stowe, Stratton, Williston and Killington. Also, Rutland City has a 1% rooms, meals and entertainment tax, and Burlington has a 2% rooms tax, a 1.5% meals tax, and a 1% sales tax.

Vermont employs a variety of taxes, and some of them have high rates. But unlike many other New England states, Vermont has no personal property or excise tax on cars, boats, snowmobiles or other non-business personal property.

This publication is designed to provide accurate and authoritative information on the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting or other professional services. If legal or other expert assistance is required, the services of a competent profesional should be sought.

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