1031 Exchange in Vermont
Vermont conforms to federal 1031 exchange rules, so gain deferred under IRC Section 1031 is also deferred for Vermont income tax purposes. The main state-specific consideration is real estate withholding: when the seller is a nonresident of Vermont, the buyer must withhold 2.5% of the purchase price and remit it to the Vermont Department of Taxes, unless the seller obtains a Commissioner's Certificate before closing reducing or eliminating the withholding. A sale that is part of a 1031 exchange is one of the eligible reasons for a certificate. Vermont taxes capital gains as ordinary income at progressive rates from 3.35% to 8.75%, which makes state-level deferral through a properly structured exchange meaningful for investors.
Fast Facts
- State Income Tax Rate
- 3.35% to 8.75% (progressive). Vermont has a progressive income tax with marginal rates ranging from 3.35% to 8.75% for tax year 2025 (Vermont Department of Taxes rate schedules).
- Conforms to Federal 1031
- Yes. Vermont's income tax starts from federal taxable income, so gain deferred under IRC Section 1031 is also deferred for Vermont purposes. There are no significant state-specific modifications.
- Non-Resident Withholding
- 2.5% of the sale price. Under 32 V.S.A. § 5847, the buyer must withhold 2.5% of the consideration when the seller is a nonresident and remit it with Form RW-171 within 30 days of the transfer. Sellers can apply to the Department of Taxes for a Commissioner's Certificate before closing to reduce or eliminate withholding; a transaction that is part of a 1031 exchange is an eligible reason.
- Property Tax Considerations
- Varies by municipality. Vermont property tax bills include both a municipal tax and a statewide education property tax, and rates differ between towns. Factor local rates into replacement-property underwriting.
- Qualified Intermediary Requirements
- Follows federal guidelines. Vermont does not impose registration, licensing, or bonding requirements on qualified intermediaries beyond federal regulations.
Legal and Tax Considerations
State Income Tax Rate
3.35% to 8.75% (progressive). Vermont has a progressive income tax with marginal rates ranging from 3.35% to 8.75% for tax year 2025.
Conforms to Federal 1031
Yes. Vermont follows federal 1031 exchange treatment; deferred federal gain is also deferred for Vermont income tax.
Non-Resident Withholding
2.5% of the sale price withheld by the buyer when the seller is a nonresident (32 V.S.A. § 5847). The seller can obtain a Commissioner's Certificate from the Vermont Department of Taxes before closing to reduce or eliminate withholding; participation in a 1031 exchange is an eligible reason. Withholding is a prepayment, not a final tax — nonresident sellers still file a Vermont return.
Property Tax Considerations
Property taxes combine a municipal tax and a statewide education property tax, with rates varying by municipality.
Qualified Intermediary Requirements
Vermont does not impose additional requirements on qualified intermediaries beyond federal regulations.
Required Documentation
- Federal Form 8824 (Like-Kind Exchanges)
- Form RW-171, Vermont Withholding Tax Return for Transfer of Real Property (filed by the buyer when withholding applies)
- Commissioner's Certificate application via myVTax (nonresident sellers seeking reduced or exempt withholding)
Clawback Rule
None
Step-by-Step Process
- 1
Identify Replacement Property
You must identify potential replacement properties within 45 days of selling your relinquished property. In Vermont, consider property tax implications and local zoning regulations when identifying properties.
- 2
Engage a Qualified Intermediary
Work with a qualified intermediary to handle the exchange funds and documentation before closing on the sale of your relinquished property. Vermont imposes no state-specific QI requirements, so vet the intermediary's bonding, insurance, and track record yourself.
- 3
Apply for a Commissioner's Certificate (non-resident sellers)
If you are a nonresident seller, apply to the Vermont Department of Taxes (via myVTax) for a Commissioner's Certificate as soon as you have a signed sales agreement. The certificate must be obtained before closing to reduce or eliminate the 2.5% withholding; a sale that is part of a 1031 exchange is an eligible reason.
- 4
Close on Replacement Property
Complete the purchase of your replacement property within 180 days of selling your relinquished property (or by your tax return due date, if earlier).
- 5
File Tax Returns
Report your 1031 exchange on your federal tax return using Form 8824. Vermont starts from federal taxable income, so the deferred gain is also deferred on your Vermont return. If withholding was collected, it is claimed as a payment on your Vermont income tax return.
- 6
Understand Vermont Property Taxes
Vermont property taxes are assessed locally and include both a municipal tax and a statewide education property tax, with rates varying between municipalities. Confirm the applicable rates for any replacement property.
- 7
Review Local Regulations
Zoning regulations and development codes vary significantly between Vermont municipalities, and some resort towns and historic districts have additional requirements. Review them before committing to a replacement property.
- 8
Check Environmental Requirements
Vermont has significant environmental regulation, including Act 250 review for larger developments and rules on wetlands, shorelands, and wastewater systems. Review environmental assessments carefully, particularly for properties near lakes, rivers, or in rural areas.
Timeline Calculator
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Common Pitfalls
Overlooking non-resident withholding requirements
Issue
When the seller is a nonresident of Vermont, the buyer must withhold 2.5% of the sale price at closing and remit it to the Department of Taxes unless the seller has obtained a Commissioner's Certificate before closing reducing or eliminating the withholding.
Prevention
Apply for a Commissioner's Certificate through myVTax as soon as you have a signed sales agreement, and allow the Department time to process it before closing. Work with a qualified intermediary and tax professional familiar with Vermont's requirements.
Underestimating seasonal market dynamics
Issue
Some Vermont markets, particularly resort areas, experience seasonal fluctuations in rental income and occupancy that can affect an investment property's cash flow.
Prevention
Underwrite seasonal properties on realistic year-round occupancy assumptions and verify actual operating history during due diligence.
Overlooking infrastructure limitations
Issue
Parts of Vermont have limited water and wastewater infrastructure, which can constrain a property's development potential and value.
Prevention
Conduct thorough due diligence on infrastructure availability and capacity when acquiring properties, particularly in rural areas or for development purposes.
Neglecting environmental regulations
Issue
Vermont regulates wetlands, shoreland protection, and wastewater systems, and larger development projects can trigger Act 250 land use review — all of which can impact property use and development.
Prevention
Include environmental assessments in your due diligence process and work with professionals familiar with Vermont's environmental regulations and Act 250.
Qualified Intermediaries
Vermont does not license or regulate qualified intermediaries at the state level, so federal rules govern. National QI companies that serve Vermont include:
Before engaging any intermediary, verify their bonding, errors-and-omissions insurance, fund-security practices, and experience with Vermont transactions.
Frequently Asked Questions
Does Vermont have any special requirements for 1031 exchanges?
Vermont follows federal 1031 exchange rules. The main state-specific issue is real estate withholding: when the seller is a nonresident, the buyer must withhold 2.5% of the sale price (32 V.S.A. § 5847). The seller can apply to the Vermont Department of Taxes for a Commissioner’s Certificate reducing or eliminating the withholding — a sale that is part of a 1031 exchange is an eligible reason — but the certificate must be obtained before closing, so start the application as soon as you have a signed sales agreement.
What is Vermont’s state income tax rate for capital gains?
Vermont has a progressive income tax with rates ranging from 3.35% to 8.75% for tax year 2025. Capital gains are taxed as ordinary income, though Vermont offers a capital gains exclusion (Schedule IN-153): a flat exclusion of up to $5,000, or a 40% exclusion for certain assets held more than three years, subject to limitations. Through a 1031 exchange, Vermont tax on the deferred gain is deferred along with federal tax.
Can I exchange a property in another state for a property in Vermont?
Yes. Section 1031 is a federal provision that allows exchanges across state lines, so you can exchange property in any state for Vermont property. Note that if you later sell the Vermont property, the state where the original property was located may claim tax on gain sourced there — consult a tax professional about multi-state exchanges.
How do the 45-day and 180-day deadlines work for a Vermont exchange?
The deadlines are federal and apply identically in Vermont: you must identify replacement property in writing within 45 days of closing on your relinquished property, and complete the acquisition within 180 days (or by your tax return due date, including extensions, if earlier). Neither deadline can be extended except by federal disaster relief, so line up candidate properties and your Commissioner’s Certificate application early.
Major Cities
Burlington, South Burlington, Rutland, Barre, Montpelier, Winooski, St. Albans, Newport, Vergennes
References
Official References
- Vermont Department of Taxes
- Vermont Department of Taxes – Real Estate Withholding
- Vermont Department of Taxes – Commissioner’s Certificate
- Vermont Department of Taxes – Personal Income Tax Rate Schedules
- 32 V.S.A. § 5847 – Withholding on sales or exchanges of real estate
- Vermont Real Estate Commission
- Vermont Agency of Commerce and Community Development
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.