Tax Facts: How Much Will You Pay at Closing?

Here’s a general overview of the Rhode Island non-resident seller’s gain tax.

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So you’ve decided you don’t want your Rhode Island property anymore and intend to put it on the market, be it an investment property or home that you’ve lived in. Be aware, though, that one of the ways that Rhode Island makes sure they get their taxes is to hit you at the closing table with what’s called a non-resident seller’s gain tax. Recognizing its status as a tourism- and seasonal property-driven state, Rhode Island got smart a while ago and started requiring that all buyers purchasing from non-resident sellers collect the Rhode Island income tax on the gain from the sale. Here’s what that means:

At closing, your closing attorney will ask you if you’re a Rhode Island resident, and you can then fill out the Rhode Island Residency Affidavit, which you can see at 1:22 in the video above. If you are a resident of the state, then the inquiry stops there; you’ll file your taxes at the end of the year, just like you normally would. However, if you are a non-resident, then you’ll be taxed on the gain from your sale. The state ensures that they get this money from you by requiring the buyer’s attorney to file that tax before the deed can be recorded.

 

 

 

Basically, Rhode Island is worried that non-resident sellers will happily skip off to California or Wyoming and they won’t be able to get jurisdiction and come after you to collect the taxes that are owed on the sale. So, if you are a non-resident seller who will show a gain from your sale, you’ll file a tax form called a Rhode Island-71.3 Election (2:58 in the video above). This form will let you establish what your basis is in the property, and therefore, it’ll tell you what the gain is, which will then become subject to IRS gain rules.

For example, you’ll have some exclusions (single filers qualify for up to $250,000 and married couples qualify for up to $500,000). These gain scenarios can get pretty problematic, but for the most part, you should be okay; you won’t get hit with huge tax bills, though you need to be aware there are some instances in which that can indeed happen. If you’re dealing with commercial or investment properties where marital exclusions don’t apply, be careful, as those sales can show big gains taxes.

I recommend talking to your attorney and your CPA about this issue as soon as possible. The Rhode Island-71.3 Election is a super simple one-page form, and your CPA can help you determine what your basis is. Reminder: Your “basis” is the value you have in your property; it could be the amount it was worth when you inherited it, or the amount it was worth when you bought plus all the work you put into it, the cost of the sale, the attorney fees, etc.

Do the work in advance. Yes, it’s a pain in the neck, but it’s worth it. Otherwise, you’ll have to try to collect that back when you do your taxes at the end of the year. You’d be amazed at how many people don’t do the appropriate accounting and pay more taxes than necessary.

Hopefully, this overview of the Rhode Island non-resident seller’s gain tax helped you get a better idea of what to prepare for. As always, reach out if you have further questions on this or any other real estate topic, and we’d be happy to chat with you. We’re here to be a go-to resource for your Rhode Island buying, selling, and investing needs.