What Is the Vermont Capital Gains Exclusion?
Understand how Vermont's capital gains exclusion can reduce your state tax liability on profits from the sale of key long-term, in-state assets.
When you sell an asset like stocks, real estate, or a business interest for more than you paid for it, the profit is known as a capital gain. These gains are typically subject to tax at both the federal and state levels. Vermont, however, provides a tax benefit that can lower the state income tax owed on specific types of these gains. This exclusion is designed to encourage certain types of long-term investment within the state.
Qualifying for the Vermont Capital Gains Exclusion
Eligibility for the Vermont capital gains exclusion depends on the nature of the asset sold. A primary requirement across all categories is that the asset must have been held for more than three years before the sale.
The exclusion is not available for all types of capital gains, as the rules target investments in local businesses and working lands. Gains from the sale of publicly traded stocks and bonds are excluded. Profit from the sale of a primary or non-primary personal residence also does not qualify for this Vermont tax benefit.
Sale of Vermont Business Interests
One category for the exclusion involves the sale of an ownership interest in a Vermont-based business. For the gain to qualify, the business must have been headquartered or had its principal operations in Vermont for the entire year preceding the sale. The sale can be structured as a disposition of the owner’s interest, such as LLC membership units or corporate stock, or as a sale of the business’s assets.
The taxpayer’s role in the business is also a consideration. The rules often require a level of active participation in the business’s operations, distinguishing these sales from passive investments. If the transaction is treated as an asset sale for federal tax purposes, the gain attributable to assets like business real estate and goodwill can be eligible for the exclusion.
Sale of Vermont Farm Property
Gains from the sale of Vermont farm property represent another qualifying category. Farm property is defined as land and depreciable property used in a farming business, which can include barns, equipment, and the farmland itself. The exclusion applies to the capital gain generated from the sale, providing a benefit to farmers who are transitioning out of the business or selling their property.
Sale of Standing Timber
The sale of standing timber from land in Vermont can also generate a qualifying capital gain. The gain must come from the sale of timber cut from land in Vermont owned by the taxpayer. The gain is calculated based on the profit from the timber sale, which can provide a tax reduction for landowners who manage their forest properties for commercial use.
Calculating the Excludable Amount
Once you determine that your capital gain qualifies, you must calculate the amount to exclude from your Vermont income. The state allows taxpayers to exclude 40% of the eligible net adjusted capital gain. This percentage applies only to the portion of your gain that meets the Vermont criteria, not your total federal capital gain.
The calculation begins with your federal tax return, where you identify the total net capital gain reported to the IRS. From this total, you must isolate the specific gain or gains eligible for the Vermont exclusion. If you have gains from multiple sources, only the qualifying Vermont-based gains are used for this calculation.
For example, a taxpayer has a total federal net capital gain of $150,000. Of that amount, $100,000 came from the sale of a qualifying Vermont business held for five years, and $50,000 came from publicly traded stock. The Vermont exclusion calculation would only apply to the $100,000 gain. The excludable amount is 40% of $100,000, which equals $40,000 to subtract on their Vermont tax return.
The total amount of the exclusion is capped. Your final exclusion is the lesser of the calculated 40% of the eligible gain, $350,000, or 40% of your federal taxable income. The Vermont Department of Taxes provides worksheets to guide taxpayers through this calculation, ensuring the 40% rate is applied properly to the qualifying gain.
Claiming the Exclusion on Your Vermont Tax Return
After calculating your excludable capital gain, you must report it on your Vermont income tax return. The process involves specific forms designed to adjust your federal income for state tax purposes.
The primary form for this is Schedule IN-112, Vermont Tax Adjustments and Credits. On this schedule, you will find a line for the “Capital Gains Exclusion” where you enter the dollar amount of your calculated exclusion.
The total adjustments from Schedule IN-112 are then transferred to your main Vermont income tax return, Form IN-111. This subtraction directly reduces your Vermont taxable income, which results in a lower overall state tax liability.
You must maintain thorough records documenting the asset sale and your exclusion calculation. This documentation should include details of the sale, proof of the holding period, and the worksheet used to determine the excludable amount. You must be prepared to provide these records if the Vermont Department of Taxes requests verification.