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Two Key Tax Changes Beginning July 1

July 09, 2019

By Ellie French, VT Digger 7/8/19 - Two significant tax changes went into effect on July 1, affecting the sale of capital assets and real estate.

The first, involving the capital gains tax, will cap the current 40% exclusion for capital gains at $350,000. That means any gain above $875,000 will be taxed at standard income tax rates. The second, a real estate transfer tax, will expand the property transfer tax liability to include the purchase of a controlling interest in a property, rather than just taxing transfers by deed.

Acting Tax Commissioner Craig Bolio said the effect of the changes really depends on the amount of money that is changing hands.

“With an $875,000 cap, if your gain is $876,000, that won’t impact you very much,” Bolio said. “But if the gain is $10 million, that will be a big change.”

The capital gains tax change, which Bolio said will likely impact just 80-85 Vermonters annually, has been projected to earn the state $2.2 million in FY 2020, and increase to $4.4 million in FY 2021 and FY 2022.

But Gov. Phil Scott and Republican lawmakers worried that the changes would not just impact those making upwards of $1 million annually, as suggested by Democratic legislators, but those at every income level.

“Some automatically assume that capital gains only affect the wealthy, but it’s not necessarily true. It can affect a wide range of income levels,” Scott said in March.

Bolio said from his research, that seems to be the case.

“In the year they have the gain, they must — by definition — have a relatively high income,” Bolio said. “But our research has shown that prior to that, it’s a little bit all over the map.”

He gave an example of a farmer earning a very modest profit on a year-to-year basis, whose property could easily sell for more than the $875,000 cap.

The new numbers put Vermont on par with capital gains taxes in other New England states, most of which don’t have an exclusion, like Vermont.

The controlling interest property transfer tax, meanwhile, is projected to bring in an additional $1.6 million in its first year, and grow in future years.

Bolio said they don’t have specific numbers on how many Vermonters will likely be affected.

“It’s very difficult to estimate that number,” he said. “There could even be sales to non-Vermont entities falling into this net. It’s difficult to accurately say.”

The reason for the increase in the capital gains tax exclusion was to replace the revenue lost by increasing the state’s estate tax exclusion, according to Richard Wolfish, a tax adviser in South Burlington.

To read the full article on VT Digger please click here.