Updated October 8, 2026. Quick answer: Generally no, if you qualify for the federal exclusion. The 2025 Form IN-111 instructions start at “Line 1 Federal Adjusted Gross Income REQUIRED entry.”, which leaves out a gain excluded under section 121. Gain above it is taxed at graduated rates of 3.35%, 6.60%, 7.60% and 8.75%, and the Department’s bulletin says the 40 percent exclusion for long-held assets does not apply to real estate “used by the taxpayer as a primary or non primary residence”.
Vermont tax on home sale profit at a glance
| Item | What the documents say |
|---|---|
| Profit on your main home | Starts from federal adjusted gross income; the pages read do not mention section 121 |
| Rate on gain above the exclusion | Graduated: 3.35%, 6.60%, 7.60% and 8.75% (unchanged in the 2026 withholding tables) |
| Collected at the sale | Nonresident sellers: buyer withholds 2.5% of the sale price. The property transfer tax is owed by the buyer, not the seller (0.5% on the first $200,000 when the home will be the buyer’s principal residence, 1.25% plus a 0.22% surcharge above that) |
| Source | Vermont Department of Taxes |
What the Vermont documents say
The 2025 Form IN-111 instructions begin with “Line 1 Federal Adjusted Gross Income REQUIRED entry.” Under the federal statute, “Gross income shall not include gain from the sale or exchange” of a principal residence that meets the ownership and use tests, so an excluded gain never enters federal adjusted gross income. That is reasoning from two documents. The Vermont pages read never name section 121. The Department’s real estate withholding page says that when real estate is sold in Vermont, state income tax is due on the gain, so a gain that is not in federal adjusted gross income is not taxed.
Vermont has a capital gains exclusion, but the Department’s Technical Bulletin 60 says the 40 percent exclusion for assets held more than three years does not apply to real estate “used by the taxpayer as a primary or non primary residence”. The same bulletin describes a separate exclusion of “The first $5,000 of adjusted net capital gain income” and says it “may be applied against all types of adjusted net capital gain income”; the residence exception is listed only under the 40 percent exclusion, so this page does not apply the 40 percent exclusion to a main home and does not compute the $5,000 alternative.
The 2025 rate schedules print rates of 3.35%, 6.60%, 7.60% and 8.75%, and say that for adjusted gross income over $150,000 line 8 is the greater of 3% of adjusted gross income less interest from U.S. obligations or the schedule calculation. The Department’s 2026 withholding instructions keep the same four rates.
What the federal exclusion requires
Most state answers start here. The statute says “Gross income shall not include gain from the sale or exchange” of property that, during the five years before the sale, you owned and used as your principal residence for periods adding up to two years or more. The limit is “shall not exceed $250,000”, or $500,000 for a husband and wife who make a joint return and meet the statute’s conditions. See CMG’s home sale taxes page and exclusion calculator.
A worked example at a $400,000 gain
An illustration, not a return: a married couple in Vermont sells their main home with a gain of $400,000 and meets the federal ownership and use tests. The gain is below the $500,000 joint exclusion, so it is not in federal adjusted gross income and, on the documents read, $0 is taxed by Vermont. As a second illustration, computed below, suppose the gain were $600,000. The amount above the exclusion would then be $100,000, which is taxed at the graduated rates and is not eligible for the 40 percent capital gains exclusion; this page computes no tax because the bracket depends on the rest of the return.
What is collected at the sale
When a seller is a nonresident, “the buyer is required to withhold 2.5% of the sale price” and remit it on Form RW-171, unless the seller obtains a Commissioner’s Certificate. That rule is for nonresident sellers.
Vermont also has a property transfer tax. The Department’s page says “The first $200,000 of value paid is subject to 0.5%” for a principal residence, with a general rate of 1.25% plus a clean water surcharge of 0.22% on value above $200,000. The principal residence rate turns on the buyer: the page defines it as a dwelling that will be occupied as “the buyer’s domicile”. On who pays, it says “When a transfer is made by deed, the buyer or transferee is liable for the transfer tax.” It is not a tax the seller owes.
What changes in 2026
Vermont: the Department’s 2026 withholding instructions keep the rates of 3.35%, 6.60%, 7.60% and 8.75%; the 2026 return rate schedule was not reachable.
What the documents do not say
- The pages read never name section 121, so conformity is reasoned from the federal starting point. The bulletin says the $5,000 alternative may be applied against all types of adjusted net capital gain income and lists the residence exception only under the 40 percent exclusion; this page does not compute the $5,000 alternative. The 2026 return rate schedule was not reachable; the 2026 withholding tables keep the same four rates and their breakpoints are withholding-method figures. The transfer tax page says the buyer is liable for it. The booklet is for tax year 2025.
Common mistakes
- Assuming the 40 percent capital gains exclusion applies to a home; the Department’s bulletin excludes real estate used as a residence.
- Counting the property transfer tax as a seller cost; the Department says the buyer is liable for it.
- Treating the 2.5% nonresident withholding as a rule for Vermont residents.
- Assuming the answer for one state applies to another, or that the state answer changes the federal tax on the sale.
Related: home sale taxes, state tax on home sale profit, how Vermont taxes capital gains, Vermont retirement taxes, and home sale exclusion calculator.
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Answer againSources
- Tax Year 2025 Vermont Income Tax Return Booklet: https://tax.vermont.gov/sites/tax/files/documents/Income-Booklet-2025.pdf
- Technical Bulletin TB-60, Taxation of Gain on the Sale of Capital Assets: https://tax.vermont.gov/sites/tax/files/documents/TB60.pdf
- Real Estate Withholding: https://tax.vermont.gov/property/real-estate-withholding
- Property Transfer Tax: https://tax.vermont.gov/property/property-transfer-tax
- 2025 Vermont Tax Rate Schedules: https://tax.vermont.gov/sites/tax/files/documents/TaxRateSched-2025.pdf
- Schedule IN-153 Vermont Capital Gains Exclusion Calculation: https://tax.vermont.gov/sites/tax/files/documents/IN-153-2024.pdf
- GB-1210 2026 Income Tax Withholding Instructions, Tables, and Charts: https://tax.vermont.gov/sites/tax/files/documents/GB-1210-2026.pdf
- 26 U.S.C. 121, Exclusion of gain from sale of principal residence (U.S. Code, GovInfo): https://www.govinfo.gov/content/pkg/USCODE-2023-title26/html/USCODE-2023-title26-subtitleA-chap1-subchapB-partIII-sec121.htm
Sources: the primary documents linked above, read on October 8, 2026. General information, not tax advice. Your own facts decide the outcome, and a tax professional or the state agency itself is the right place to confirm anything consequential.