There are several tax issues to address with the sale of your property. These include local property taxes, transfer tax, land gains tax, nonresident withholding and federal income tax reporting.
At the time of closing, an adjustment is made for property taxes so that the buyer and seller are only paying property tax for the time that they actually own the property. Depending on when taxes are due and when the closing takes place, the buyer or seller may receive a credit at the closing for property taxes that are paid covering a period of time that the opposite party owned the property. Additionally, if the seller will receive a Property Tax Adjustment from the State of Vermont which will be given as a credit on the property tax bill, the buyer will need to reimburse the seller that amount less any portion of the credit applied to a paid installment. This will require the buyer to bring extra money to closing or sign an agreement with the seller to pay this amount at a later time. This can be a somewhat complicated and confusing calculation. We can review and explain the tax adjustment to be sure that you are paying no more than your fair share of the property taxes.
The State of Vermont requires a transfer tax be paid whenever there is a sale of real estate. This tax is payable by the buyer. However, it is the obligation of the seller to provide the completed transfer tax return. Our office will prepare this tax form and deliver it to the closing with the Warranty Deed.
Vermont Land Gains Tax
The sale of property which is not your principal residence or will not become the principal residence of the buyer may be subject to a special Vermont Land Gains Tax (“VLGT’). You must be concerned with this tax if you have not owned the property at least six years. The VLGT is not the same as your federal or state income tax. The tax is computed based on a matrix taking into account the profit you are making from the sale of the land (the VLGT is not imposed on the profits from the sale of the buildings) and the amount of time you have owned the property. This tax may also be incurred if your property exceeds ten acres in size, even though it was used as a primary residence. We will prepare the necessary forms and do the computations. We will be in touch with you to obtain the information we need to compute the tax and let you know our estimate of the amount.
If you are not a resident of the State of Vermont and/or the United States, a special withholding tax on the proceeds from the sale of property is imposed. The State withholding rate is a maximum of two and one-half percent (2.5%) of the total sale price of the property. The Federal withholding rate is a maximum of ten percent (10%) of the sale price. The applicable regulations provide that the amount of the withholding may be reduced if you can show the government that your tax liability is less than the amount of the withholding. To do that we must prepare and file an application for both the State and Federal withholding. If the amount that will be withheld is not substantially greater than the withholding, it may not be worth the expense to you to seek the reduced withholding. The funds that are withheld are either applied to your income tax liability from the sale of the property or returned to you when you file your income tax return.
Federal Income Tax Reporting
At the closing, you will be asked to sign an IRS W-9 request for your taxpayer identification number. You will then be given a copy of the 1009-S form that is sent to the IRS to report your proceeds from the sale of your property. If you used your property as your primary residence, it is likely that no federal tax will be due. However, there are circumstances where tax will be due particularly if you used the property for any commercial or rental purposes. Please consult a federal income tax professional to determine what tax may be due from the sale of your property.