Vermont Depreciation Recapture on Investment Property Sales
Vermont generally follows federal tax laws regarding depreciation recapture on investment properties, but has some state-specific considerations:
Key Points About Vermont Depreciation Recapture:
- Vermont uses federal adjusted gross income as the starting point for state taxes
- Depreciation recapture is taxed at Vermont’s marginal income tax rates (up to 8.75% for 2023)
- The state does not offer special treatment or lower rates for depreciation recapture
- Property owners must report recaptured depreciation on both federal and state returns
Federal Rules That Apply in Vermont:
- Section 1250 depreciation recapture is taxed as ordinary income up to 25%
- Recapture applies to the lesser of:
- The gain realized on the sale
- Total depreciation deductions taken
- Any gain above the original purchase price is taxed at capital gains rates
Frequently Asked Questions
Q: Does Vermont have different depreciation recapture rates than federal?
A: No, Vermont uses federal rates but taxes the recaptured amount at state income tax rates.
Q: Can I avoid depreciation recapture in Vermont?
A: You can defer it through a 1031 exchange, but cannot completely avoid it.
Q: What is Vermont’s tax rate on depreciation recapture?
A: It’s taxed at your marginal state income tax rate, up to 8.75%.
Q: Do I need to file separate recapture forms for Vermont?
A: No, you report it on your standard Vermont income tax return.
Q: How does Vermont handle 1031 exchanges?
A: Vermont follows federal 1031 exchange rules for deferring depreciation recapture.
Q: Is there a state-level exclusion for depreciation recapture?
A: No, Vermont does not offer any special exclusions.
Q: Can rental property losses offset depreciation recapture?
A: Generally no, recapture must be recognized regardless of other losses.
The Bottom Line
Vermont’s treatment of depreciation recapture closely mirrors federal rules, with the main difference being the state tax rates applied. Property investors should carefully track depreciation deductions and consider consulting with a tax professional to properly plan for and manage depreciation recapture tax liability when selling investment properties in Vermont.