1031 Exchange Rules in Vermont

Last reviewed: June 2026. State rules change. Verify current forms before closing.

What Is Different in Vermont

Vermont is the only state on this list that runs two separate tax regimes at your closing. First, the familiar one: 2.5% income tax withholding on nonresident sales, with a 1031 exemption obtained from the Department of Taxes before closing. Second, the unusual one: the Land Gains Tax, a separate tax on short-term land speculation with its own buyer withholding of 10% of the land value. The Land Gains Tax has a 1031 exemption too, but with a trap that catches out-of-state buyers: it only works if you exchange Vermont land for Vermont land. Buy your replacement property in another state and the Land Gains Tax exemption disappears, even though your federal and Vermont income tax deferral remains intact.

Does Vermont Conform to IRC Section 1031?

Yes, for income tax purposes. Vermont follows the federal like-kind exchange rules for real property, so a qualifying exchange defers Vermont income tax along with federal tax. New to exchanges? Start with our 1031 exchange guide.

The Land Gains Tax is a different statute with its own narrower rules, covered below.

Vermont Tax Rate on Real Estate Gains

Vermont taxes capital gains as ordinary income at a top rate of 8.75% for 2026, with limited exclusions. On a $500,000 gain, that can approach $43,750 of state tax on top of the federal bill. A qualifying exchange may defer all of it.

Regime One: Income Tax Withholding and Form RW-171

Under 32 V.S.A. 5847, the buyer withholds 2.5% of the sales price when purchasing Vermont real estate from a nonresident, reported on Form RW-171.

The 1031 exemption is not automatic. The seller must obtain a Commissioner's Certificate from the Vermont Department of Taxes before closing, submitting the exchange agreement with the request. Plan for this the way you would plan for Maine's REW-5: start when the purchase agreement is signed, and have your qualified intermediary documentation ready to attach. A qualified intermediary is the independent party that holds your sale proceeds during an exchange. WealthBuilder 1031 prepares exchange documentation on a timeline that supports the certificate request.

Regime Two: The Land Gains Tax

Vermont's Land Gains Tax targets short-term speculation in land. The essentials:

• What it taxes. Gain attributable to Vermont land (not buildings) held for less than 6 years, at rates that can reach 10% depending on holding period and markup.
• Buyer withholding. The buyer withholds 10% of the consideration attributable to the land (Forms LGT-177/LGT-178) unless an exemption or commissioner's certificate applies.
• The 6-year exit. If you have held the land 6 years or more, no Land Gains Tax applies and no LGT withholding or filing is required. For most long-term investors, this regime never comes into play.

The 1031 trap. The Land Gains Tax regulation honors federal nonrecognition only to the extent gain is actually deferred, and it expressly denies the exemption where Vermont land is exchanged for non-Vermont land or proceeds are invested in non-Vermont land. So an investor who has held Vermont land under 6 years and exchanges into property in another state still owes Land Gains Tax on the land portion, even though the income tax is deferred. Exchanging into Vermont land preserves both deferrals.

Federal Taxes Still Apply

A Vermont exchange defers two layers: federal and state income tax. Here is what a taxable sale looks like without an exchange, using round numbers.

Example: $1,000,000 sale of a Vermont rental. Original purchase $600,000, with $100,000 of depreciation taken, so the adjusted basis is $500,000 and the total gain is $500,000.

Figures are illustrative and rounded, and exclude any Land Gains Tax on land held under 6 years. Your rates depend on income, filing status, and basis. Run your own numbers with our 1031 exchange calculators, then confirm them with your tax advisor.

Risks and Things That Go Wrong in Vermont Exchanges

• Treating the two regimes as one. The Commissioner's Certificate handles income tax withholding; it does not make the Land Gains Tax go away. Each regime needs its own analysis.
• The out-of-state replacement trap. Land held under 6 years and exchanged into another state still owes Land Gains Tax on the land portion. If you are near the 6-year mark, timing the sale can matter more than the exchange structure.
• No certificate before closing. Without the Commissioner's Certificate, the buyer withholds 2.5% even on a qualifying exchange, and you wait for a refund.
• Boot surprises. Cash taken at closing or mortgage relief not offset with new debt or additional cash creates recognized gain, which affects both regimes.
• Failed deadlines. The federal 45-day identification and 180-day completion rules apply with no state extensions. See the IRS rules for 1031 exchanges.
• Deferral is not elimination. The IRS and Vermont will tax the deferred gain when you eventually cash out. Plan the exit, not just the exchange.

Vermont 1031 Exchange FAQs

Does a 1031 exchange avoid Vermont's 2.5% withholding?
Yes, if you obtain a Commissioner's Certificate from the Department of Taxes before closing, submitting your exchange agreement with the request.

What is the Land Gains Tax?
A separate Vermont tax on gain from land held less than 6 years, at rates up to 10%, with its own buyer withholding of 10% of the land consideration. It applies to the land only, not buildings.

Can a 1031 exchange exempt me from the Land Gains Tax?
Only if you exchange Vermont land for Vermont land, and only to the extent gain is actually deferred. Exchanging into another state forfeits the Land Gains Tax exemption.

I have owned my Vermont property for 8 years. Does the Land Gains Tax affect me?
No. Land held 6 years or more is outside the Land Gains Tax, with no LGT withholding or filing at closing.

Does Vermont track my deferred gain after the exchange?
No. Vermont has no claw-back rule and no annual reporting tied to deferred exchange gain.

Sources

• 32 V.S.A. Section 5847; 32 V.S.A. Section 10001 et seq.
• Vermont Land Gains Tax Regulation (Code Vt. R. 10-060-020), Sections 1.10005(c), 1.100072
• Vermont Department of Taxes, Forms RW-171, LGT-177/LGT-178
• Tax Foundation, State Individual Income Tax Rates and Brackets, 2026

Want to learn more?

Our 1031 exchange guide covers the full process from sale to replacement. Ready to start a Vermont exchange? WealthBuilder 1031 is attorney-owned, serves all 50 states, and charges a flat $1,000 fee. Start at WealthBuilder1031.com or call 888-508-1901.

This page does not constitute legal or tax advice. Consult your attorney and tax advisor about your specific situation.

Ready to start your Vermont 1031 exchange? WealthBuilder 1031 acts as your qualified intermediary for a flat $1,000 fee, $750 at your sale and $250 at your purchase. See our Vermont 1031 exchange services to get started.