Capital gains tax in Vermont (2026): selling a business, real estate or farm

Vermont's exclusion rewards patient owners of real things

Vermont taxes gains through its regular brackets, which top out at 8.75% (32 V.S.A. 5822). What sets it apart is Schedule IN-153. Every filer with a net capital gain can choose one of two exclusions (2025 instructions):

• Flat exclusion: the first $5,000 of net adjusted capital gain.
• Percentage exclusion: 40% of adjusted net capital gain from assets held more than three years, limited to $350,000 (2025 IN-153). Vermont notes the maximum excluded amount is reached at $875,000 of gain.

Either way, the excluded amount cannot exceed 40% of federal taxable income (2025 IN-153). Qualified dividends do not count as capital gain for Vermont, and a filer whose federal return shows a net capital loss gets no exclusion at all, even if a farm sale inside it produced a gain.

Which sales qualify for 40%, and which do not

The 40% option is aimed at farms, forests, closely held businesses and investment real estate. Even when held more than three years, these do not qualify (2025 IN-153; 32 V.S.A. 5811(21)(B)):

• Real estate used as the seller's primary or nonprimary home.
• Depreciable personal property, such as business equipment, vehicles and machinery, except farm property and standing timber.
• Publicly traded stocks, bonds and other exchange-traded instruments.

So a dairy farmer's land, barns, herd-related equipment and woodlots can all count, a manufacturer's goodwill and building can count, and the manufacturer's machinery cannot. A retiree selling an index fund portfolio is limited to the $5,000 flat exclusion. Recapture taxed as ordinary income under IRC 1245 is not capital gain and gets no exclusion. Hold-period math matters: an asset bought 34 months before closing gets nothing under the 40% method.

Worked example: a dairy farm sold three ways

A joint-filing couple with $120,000 of other income sells farmland held for 20 years. Federal long-term rates for 2026 are 0%, 15% and 20%, with 20% above $613,700 of joint taxable income (Rev. Proc. 2025-32); the federal guide covers that piece.

• Land only, $875,000 gain: 40% hits the $350,000 cap exactly (2025 IN-153), and Vermont tax is $45,938, total $221,288.
• Whole farm, $2,600,000 gain in one year: the cap does not grow, so Vermont takes $196,875 and total tax is $803,935.
• Same farm over three tax years: each year's return gets its own IN-153 and its own $350,000 cap, so Vermont drops to $136,500, a state saving of $60,375, and total tax falls to $656,600.

That annual cap is the most Vermont-specific reason to look at a Section 453 installment sale. Farm property is also exempt from the federal Section 453A interest charge on large notes (IRC 453A(b)(3)(B)); the farmland guide covers the federal mechanics.

The 3% of AGI floor

When federal adjusted gross income exceeds $150,000, Vermont tax is the greater of the regular computation or 3% of federal AGI (32 V.S.A. 5822(a)(6), current for 2026). The exclusion lowers Vermont taxable income but not federal AGI, so a seller with large deductions and a big excluded gain should run both numbers. In most sale years at these sizes the regular tax is higher and the floor does not bite.

Land gains tax and nonresident withholding

Two Vermont closing taxes catch out-of-state sellers and quick flips:

• Land gains tax: applies to gain on Vermont land the seller held fewer than six years, with a rate that rises with the gain percentage and falls with holding time (Vermont Department of Taxes, 2026). Unless an exemption applies, the buyer withholds 10% of the price allocated to land on Form LGT-177, and the seller files LGT-178 within 30 days.
• Nonresident income tax withholding: the buyer withholds 2.5% of the price from a nonresident seller and files Form RW-171 within 30 days, unless a Commissioner's Certificate reduces it (FS-1177, 2026).

For installment sales, a nonresident can either report gain each year as payments arrive, with the withholding credited in those years, or elect out in the sale year and pay a 6% tax on the entire gain up front (FS-1177, 2026; 32 V.S.A. 5847(h)).

Vermont estate tax and the hold decision

Vermont taxes estates at 16% of the Vermont taxable estate over $5,000,000 (32 V.S.A. 7442a, deaths in 2026). A farm family deciding between selling now and holding for heirs is weighing that against the federal basis step-up; the hold-for-step-up analysis and the charitable remainder trust analysis show both. Selling a conservation easement first, then the restricted land, is another Vermont pattern covered in the conservation easement guide. Get the Big Sale Tax Analysis at /analysis/ to model the exclusion year by year.

Run your own numbers

Frequently asked questions