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Vermont Step-Up in Basis
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Vermont Step-Up in Basis

Vermont taxes the gain on inherited property, so the IRC Section 1014 reset matters here. How basis resets to date-of-death value, and how to prove it.

By Settled Editorial

When you inherit property in Vermont, its cost basis resets to the fair market value on the owner's date of death. That reset comes from Internal Revenue Code Section 1014, and it wipes out the capital gains tax on everything the asset gained during the owner's lifetime. You are taxed only on growth after the death, and only when you sell.

Vermont changes the stakes. Unlike New Hampshire next door, Vermont runs a personal income tax, and it reaches the gain you report. Three Vermont rules then decide what you keep: an inventory statute that puts the date-of-death number in the court file, a capital gains exclusion that mostly misses inherited houses, and a 2.5 percent withholding that lands on out-of-state sellers at closing.

What The Step-Up Does To Your Tax Bill

Basis is what the tax system treats as your cost in an asset. When you sell, you pay capital gains tax on the sale price minus that basis. The step-up changes the starting number.

The problem it solves

Say your mother bought a house in Barre in 1994 for $76,000. At her death in 2026 it is worth $358,000. If she had signed the deed over to you while she was alive, you would take her $76,000 cost, called a carryover basis, and a sale at $358,000 would show a $282,000 gain.

Because you inherited the house instead, your basis steps up to $358,000. Sell at $358,000 and your gain is zero. Sell two years later for $381,000 and you report a $23,000 gain rather than $305,000.

Where the rule comes from

The rule is federal. IRC Section 1014(a) gives property acquired from a decedent a basis equal to "the fair market value of the property at the date of the decedent's death." No Vermont statute sets a basis of its own, and Vermont borrows the federal answer twice over. 32 V.S.A. § 5824, "Adoption of federal income tax laws," adopts "the statutes of the United States relating to the federal income tax, as in effect on December 31, 2024" for computing tax liability under the income tax chapter. 32 V.S.A. § 5811(21) then defines an individual's taxable income as federal adjusted gross income with a short list of Vermont additions and subtractions. Section 1014 does the work, and Vermont accepts the result without a separate computation.

The federal reach is wide. It covers property that passes through Vermont probate, a funded revocable trust, an enhanced life estate deed under 27 V.S.A. chapter 6, joint ownership with a right of survivorship, a payable on death bank account, and a transfer on death security registration under 9 V.S.A. chapter 134. Skipping probate costs nobody the step-up, which is worth knowing before you read how to keep assets out of probate here.

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Vermont Charges No Inheritance Tax, And Its Estate Tax Uses Your Number

Two separate taxes get confused here, so take them apart.

  • No inheritance tax. 32 V.S.A. chapter 181, "Inheritance Taxes," prints in the section list as "§§ 6501-6952. Repealed." Nothing is charged to you for receiving an inheritance.
  • An estate tax, paid by the estate. 32 V.S.A. § 7442a, "Imposition of a Vermont estate tax and rate of tax," charges nothing on a Vermont taxable estate under $5,000,000.00, and 16 percent of the excess over $5,000,000.00 once the estate reaches that line, multiplied by the Vermont situs fraction in subsection (b). It taxes the excess, not the whole estate.
  • An income tax that reaches the gain. 32 V.S.A. § 5822, "Tax on income of individuals, estates, and trusts," imposes tax for each taxable year on taxable income earned or received by every individual, estate and trust. Rates and brackets move, so read the current schedule at the Department of Taxes rather than an article.

One line in the estate tax statute ties the whole subject together. Section 7442a(c) says "All values shall be as finally determined for federal estate tax purposes." The date-of-death figure the estate reports is the same figure you carry as basis. Getting it right once serves both filings, and getting it wrong once damages both. For the return side of that question, see the estate tax question, and to test whether the estate crosses the $5,000,000.00 line at all, run it through the Vermont estate tax calculator.

The Vermont Capital Gains Exclusion Usually Misses An Inherited House

Vermont lets a filer subtract part of adjusted net capital gain from taxable income, and heirs hear about it and assume it covers them. Read the carve-outs first.

32 V.S.A. § 5811(21)(B)(ii) sets out two methods, claimed on Schedule IN-153. The Department of Taxes describes them this way in the 2025 IN-153 instructions:

  • The flat exclusion. $5,000 or the actual amount of net adjusted capital gains, whichever is less. No asset-type carve-out applies to this branch.
  • The percentage exclusion. 40 percent of adjusted net capital gain from the sale of assets held for more than three years.

The statute then lists what the percentage method cannot touch, and the Department repeats the list in its instructions:

  1. Real estate, or a portion of real estate, used as a taxpayer's primary or nonprimary home
  2. Depreciable personal property, other than farm property and standing timber
  3. Stocks or bonds that are publicly traded or traded on an exchange
  4. Any other financial instruments that are publicly traded or traded on an exchange

An inherited house is item 1. An inherited brokerage account is items 3 and 4. Between them, the percentage exclusion is off the table for most Vermont heirs, and the flat exclusion is what remains. Two more limits apply to either method: the subtraction cannot exceed 40 percent of federal taxable income or $350,000, whichever is less, and a federal return showing a net capital loss gets no Vermont exclusion at all.

If the estate sells the property before distributing it, the exclusion moves with the taxpayer. The estate files Form FIT-161, Fiduciary Return of Income, and claims the exclusion on Form FIT-162, "VT Capital Gains Exclusions for Estates or Trusts."

Proving The Date-Of-Death Value In Vermont

Vermont makes this easier than most states, and the reason is a rule most families never notice.

The inventory carries the number

14 V.S.A. § 1051, in a chapter titled "Inventory, Appraisal, and Accounts," gives the executor or administrator 60 days after appointment to prepare an inventory of property owned by the decedent at the time of death. The statute says exactly what has to appear: the property listed with reasonable detail, and for each item "its fair market value as of the date of the decedent's death, and the type and amount of any lien or encumbrance that may exist with reference to any item." The original goes to the Probate Division of the Superior Court, copies go out under the Rules of Probate Procedure, and the court may extend the time for good cause.

That document is the best free basis record a Vermont family will get. It is dated to the death, it is itemized, and it shows the encumbrances that affect what the property was actually worth. The 60 days runs from appointment rather than from the death, which matches how Vermont measures the rest of the estate clocks. Our guide to an executor's job in Vermont walks through preparing and filing it.

An estate holding Vermont real estate cannot skip the inventory

This is where Vermont diverges from states where an heir often finds nothing in the court file.

14 V.S.A. § 1852(c) does waive the inventory: when the court grants a motion to waive further administration, its order waives the duty to file an inventory, waives or discharges the fiduciary bond, and dispenses with further filing beyond the final affidavit of administration. Look at what it takes to qualify. Both section 1852(a)(3) and section 1852(b)(3) require that "the decedent owned no real property in the State of Vermont."

The small estate route closes the same way. 14 V.S.A. § 1901(a) applies only when the estate has a fair market value of not more than $45,000.00 and "consists entirely of personal property," with a time-share estate under 32 V.S.A. § 3619(a) as the single written exception. Our guide to Vermont's simplified routes covers both.

Put those together. If the decedent owned a house, a camp, a woodlot or any other Vermont land, the estate runs full administration, and the section 1051 inventory with its date-of-death fair market values is mandatory. The number you need is in the court file.

An inventory value is not automatically an appraisal

Read how each figure was reached before you rely on it. 14 V.S.A. § 1052, "Appraisers," says the fiduciary "may employ one or more qualified and disinterested appraisers to assist in ascertaining the fair market value as of the date of the decedent's death of any assets the value of which may be subject to reasonable doubt," and the names and addresses of any appraisers go on the inventory beside the items they appraised. The verb is "may." Nobody has to hire one.

The small estate statute is blunter still. Section 1901(a)(5) asks for an inventory "including information or estimates available at the time of filing." An estimate satisfies the court. It will not satisfy an IRS examiner years later.

So pull the inventory from the court file, then check it. An item listed with no appraiser next to it is an estimate, and an estimate for a house is usually the town's assessed value, which is set for property tax purposes and often trails the market. Order your own date-of-death appraisal when the number matters.

What to gather, by asset

  • Real estate. Order a date-of-death appraisal from a licensed Vermont appraiser. An appraiser can date the opinion retroactively, and it gets harder to support the further you get from the death.
  • Publicly traded stock. Average the high and low trading price on the date of death. If the death fell on a weekend or a holiday, average the nearest trading days on either side.
  • Bank and brokerage accounts. Ask for date-of-death statements. Most firms produce them on request and will not keep producing them forever.
  • A family business or farm. Commission a professional valuation while the books and the people who kept them are still available.
  • Vehicles, equipment, art, jewelry, firearms. Get a written appraisal for anything worth appraising, and photograph the rest.

The alternate valuation date rarely applies

An executor who files a federal estate tax return, Form 706, may elect the alternate valuation date under IRC Section 2032, which values the estate six months after death. That election exists only when a 706 is actually filed, and the IRS filing threshold for deaths in 2026 is $15,000,000. Almost no Vermont estate reaches it, so the date-of-death value is the number nearly every heir uses.

Add what you spend afterwards

Capital improvements you make after inheriting raise your basis. A new roof, an addition, a septic replacement, a drilled well or a kitchen remodel all count. Routine repairs do not, so track the two separately and keep receipts.

ItemAmount
Date-of-death value (your stepped-up basis)$358,000
New septic system+$24,000
Roof and insulation+$19,000
Adjusted basis$401,000
Sale price$438,000
Capital gain you report$37,000

What Steps Up And What Does Not

Most capital assets reset:

  • Real estate, including homes, camps, land and rental property
  • Stocks, bonds, mutual funds and exchange-traded funds
  • An interest in a family business or farm
  • Vehicles, boats, equipment, art, jewelry and other property worth appraising

Three categories sit outside the rule:

  • Retirement accounts. Traditional IRAs, 401(k) plans and similar tax-deferred accounts are income in respect of a decedent. Heirs pay ordinary income tax on withdrawals and the account gets no basis reset.
  • Property gifted during life. A lifetime gift carries the giver's basis to you. Signing the camp over early is the most expensive mistake in this area.
  • Assets that come back within a year. If you gave appreciated property to someone, they died within one year, and it returned to you, IRC Section 1014(e) denies the step-up.

Jointly Owned Property Steps Up By Half

IRC Section 1014(b)(6) treats a surviving spouse's half of community property as acquired from the decedent, so couples in the nine community property states reset a whole asset at the first death. That paragraph reaches only property held "under the community property laws of any State," and Vermont's Title 14 carries no community property chapter.

A Vermont married couple is in the common law column. When they own an asset jointly, only the deceased spouse's share steps up at the first death, and the survivor keeps the original cost on their own half. The same half-and-half rule applies to any co-owned property held with a right of survivorship, whether the co-owner is a spouse, a sibling or a child.

An Enhanced Life Estate Deed Keeps The Property In The Owner's Estate

Vermont has no transfer on death deed. What it has is the Enhanced Life Estate Deed Act at 27 V.S.A. chapter 6, and families ask whether using one trades away the basis reset. The statute answers that on its face.

27 V.S.A. § 653(2) defines the instrument as a deed in which the grantor "expressly reserves a common law life estate," "expressly reserves the right to convey the property during the grantor's lifetime," and the grantee takes a contingent remainder with no vested rights before the grantor dies. 27 V.S.A. § 654(a) adds that a validly executed and recorded deed does not affect the grantor's ownership rights or those of the grantor's creditors, transfers no present right, title or interest, and does not subject the property to process from the grantee's creditors. Section 654(b) lets the grantor convey the property without joinder, consent, agreement or notice from the grantee, and section 654(c) vests the stated interest only on the grantor's death.

That is the fact pattern IRC Section 2036, "Transfers with retained life estate," describes, and IRC Section 1014(b)(9) gives a date-of-death basis to property required to be included in the decedent's gross estate. The land skips probate and the basis still resets. Ask a Vermont tax preparer to confirm the treatment on your particular deed before you price a sale.

One cost belongs with the deed. Section 654(d) makes an executed and recorded enhanced life estate deed subject to the property transfer tax under 32 V.S.A. chapter 231, so recording one is not free.

Selling: Plan For The 2.5 Percent Vermont Withholding

Here is the rule that surprises out-of-state heirs at the closing table.

32 V.S.A. § 5847(a), "Withholding on sales or exchanges of real estate," says that on a sale or exchange of real property located in Vermont "by a nonresident of Vermont, the transferee shall be required to withhold and transmit to the Commissioner within 30 days of such sale or transfer, a withholding tax equal to 2 1/2 percent of the consideration paid for the transfer." A buyer who fails to withhold becomes personally liable for the amount. Buyers report it on Form RW-171.

Read the base. The withholding runs on the consideration, not on the gain. Sell a house you inherited last year at exactly its stepped-up basis, owe Vermont nothing on a zero gain, and the buyer still holds back 2.5 percent of the price.

The statute gives two exits. Section 5847(b)(1) covers a seller who furnishes a certificate stating under penalty of perjury that they are a Vermont resident. Section 5847(b)(2)(A) covers everyone else: the Commissioner issues a certificate stating "no tax is due on the gain from that transfer," and section 5847(c) lets the Commissioner set a reduced withholding amount instead. The Department of Taxes lists "Withholding on gain would be lower than 2.5% of the sales price" among its stated reasons to request a Commissioner's Certificate, and a fresh step-up is what makes that true. Request the certificate before closing. After closing, you are waiting on a refund.

Vermont also runs a separate land gains tax at 32 V.S.A. chapter 236, with its own withholding. Basis works the same way there: 32 V.S.A. § 10005(a) says "The provisions of Title 26 of the U.S. Code shall determine the basis of land sold or exchanged," so the stepped-up figure carries across. The definition of "land" at 32 V.S.A. § 10002(a) is narrow, reaching land "purchased and subdivided by the transferor within the six years prior to the sale or exchange" and stating that "Buildings or other structures are not included in this definition." An ordinary inherited house sale sits outside it. Check with the Department if you plan to subdivide before you sell. Our guide to selling the inherited property covers the deed, the town clerk and the rest of the sale.

Records To Keep

Hold on to these so you can support your basis if the IRS or the Department of Taxes ever asks:

  • The date-of-death appraisal for real estate and for anything else of real worth
  • The section 1051 inventory from the court file, and the appraiser names printed on it
  • Brokerage and bank statements showing date-of-death balances
  • Receipts for capital improvements you make after inheriting
  • The closing statement, the selling-expense records, and any Commissioner's Certificate you obtained

Keep them at least three years past the return that reports the sale. Longer is safer, and storage is cheap next to a disputed gain.

Frequently Asked Questions

Does Vermont tax me when I inherit property?

Vermont charges no inheritance tax. Its inheritance tax chapter, 32 V.S.A. chapter 181, prints as sections 6501 through 6952 repealed. Vermont does run an estate tax on the estate itself under 32 V.S.A. section 7442a, which charges nothing on a Vermont taxable estate under $5,000,000.00 and 16 percent of the excess above that line. What reaches the heir is the tax on the gain when the inherited asset is sold, because Vermont taxes the income of individuals, estates and trusts under 32 V.S.A. section 5822.

Where is the date-of-death value written down in a Vermont estate?

In the inventory. 14 V.S.A. section 1051 makes the executor or administrator prepare one within 60 days after appointment, listing the property owned at death with reasonable detail and showing for each item its fair market value as of the date of the decedent's death plus the type and amount of any lien or encumbrance. The original is filed with the Probate Division of the Superior Court, and the court may extend the deadline for good cause.

Can a Vermont estate holding a house skip the inventory?

No. Waiver of administration wipes out the inventory duty under 14 V.S.A. section 1852(c), but both subsections 1852(a)(3) and 1852(b)(3) require that the decedent owned no real property in the State of Vermont. The small estate route is closed too, because 14 V.S.A. section 1901(a) caps it at $45,000.00 and requires an estate consisting entirely of personal property. So a Vermont estate that holds land or a house runs full administration and files the section 1051 inventory.

Does the Vermont capital gains exclusion cover an inherited house?

The percentage method does not. 32 V.S.A. section 5811(21)(B)(ii) offers either a flat exclusion or a 40 percent exclusion on assets held more than three years, and the Department of Taxes applies the statute's carve-out list to the percentage method: real estate used as a primary or nonprimary home, depreciable personal property other than farm property and standing timber, and publicly traded stocks, bonds and other financial instruments. The flat exclusion carries no asset-type carve-out and is $5,000 or the actual net adjusted capital gains, whichever is less. Either way the subtraction cannot exceed 40 percent of federal taxable income or $350,000, whichever is less.

I live out of state. Will Vermont withhold tax when I sell the house I inherited?

Yes, unless you get ahead of it. 32 V.S.A. section 5847(a) makes the buyer withhold 2.5 percent of the consideration paid, not 2.5 percent of the gain, on a sale of Vermont real property by a nonresident, and transmit it within 30 days. Section 5847(b)(2)(A) lets the Commissioner of Taxes issue a certificate stating that no tax is due on the gain, and section 5847(c) allows a reduced amount. The Department lists withholding on the gain being lower than 2.5 percent of the sale price among its reasons to grant one, which is exactly what a fresh step-up produces.

Does a Vermont enhanced life estate deed cost the heir the step-up?

No. 27 V.S.A. section 653(2) defines the deed as one where the grantor expressly reserves a common law life estate and the express right to convey during life, and 27 V.S.A. section 654(a) says the recorded deed does not affect the grantor's ownership rights and transfers no present interest to the grantee. Title vests only at the grantor's death under section 654(c). That is the pattern IRC Section 2036 describes, and IRC Section 1014(b)(9) gives a date-of-death basis to property required to be included in the decedent's gross estate.

This guide is general information about Vermont estates, not advice for your situation.

Sources:

It is not legal advice.

Information current as of August 4, 2026

Settled Estate is not a law firm, and this content is for informational purposes only and does not constitute legal advice. Probate laws and procedures in Vermont can change. Consult with a qualified attorney for advice specific to your situation. Full disclaimer.

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