Here’s how non-resident withholding taxes work in the state of Rhode Island.
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Have you prepared yourself for the non-resident withholding requirements? Today I’m going to explain this topic in detail to hopefully make it a little more interesting for you.
Rhode Island has what is called a non-resident withholding tax in order to capture the income tax on the sale of a property. If you are not a resident of Rhode Island or a corporation that isn’t formed in Rhode Island, the buyer of your property will have to file income tax on your behalf.
Let’s say you sell an investment property in Rhode Island but live in Connecticut. The buyer of your property, through their attorney, will file a withholding tax return in the amount of 6%. That’s a big chunk of change.
When the payment is filed and recorded, your lien is released.
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Why does the buyer have to do it? Rhode Island knows that if you’re living in Connecticut, it’s harder for them to go after you to collect the tax. Therefore, they make it the buyer’s responsibility and put a lien on the property until the situation is resolved.
The buyer’s attorney will file a certificate of payment with the Rhode Island Division of Taxation. When it’s filed, your payment is recorded and your lien is released.
How much is the tax? If you don’t file a certificate of withholding based on your gain, it will be 6% of the total sale of your property minus the cost of sale. Let’s say you sell a multi-family property for $500,000, but you did not go to your CPA to figure out your basis. In this case, you would pay 6% of $500,000.
If you took a couple of minutes to fill out Rhode Island tax form 71.3, however, you could take the total cost of your sale, minus the broker’s fees, minus what you paid for the property, and minus what you had to pay to bring this property up to the value that you sold it at. This is where you need your CPA to make sure you’re doing everything right. If you file this form, you’ll only pay the income tax on your gains.
If you have any questions about this situation or anything else related to real estate, don’t hesitate to reach out via phone or email. I look forward to hearing from you soon.