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Rhode Island Non-Resident Sales Tax

There is a common misunderstanding that the State of Rhode Island taxes non-residents upon the sale of their Rhode Island homes. It is often told that the State will require these sellers to pay a six percent tax at closing. Fortunately for most, this is untrue.

Over a decade ago, Rhode Island lawmakers enacted legislation that required closing Attorneys and Settlement Companies to withhold a portion of an out of state sellers proceeds when selling a property. This withholding was not a tax but rather a vehicle to aid in the collection of taxes that were due to the State. Prior to this action it was nearly impossible for The State to collect taxes from non-residents. This non-resident withholding is sent by the closing Attorney to the State of Rhode Island until the seller provides evidence that no tax is due.

More times than not, sellers have no Rhode Island State tax liability because they are selling a primary residence. When this is the case, the sellers are refunded the entire withholding amount upon filing a Rhode Island State Tax return proving no tax due. If a tax is due, this amount is retained and any balance is refunded upon filing.

Sellers that are confident that there will be no tax liability for the Sale of their Rhode Island property can choose to file with the State prior to the sale for exclusion from the withholding. This will need to be done thirty to forty days prior to settlement. I recommend having your tax professional do the filing to eliminate any chance of error related delays. A document will be provided by the State to negate the need for the withholding at settlement. This must be presented to the settlement agent for evidence of exemption from the withholding.

Every seller in every Real Estate sale in Rhode Island is required to execute a residency affidavit at the time of settlement. Representation on this affidavit of Rhode Island Residency will allow you to be exempt from the withholding. Misrepresentation of residence is a crime and can have financial as well as criminal consequences. Those representing non-residency status will have to provide evidence of tax exemption from the State or be subject to a withholding of six percent of the (Proceeds) of the sale.

When calculating the possible withholding, base the tax on six percent of the proceeds after satisfaction of all mortgages and closing related expenses. (Not the gross sales price).

The most frequent scenario that I come across when dealing with this residency issue is when the seller has been relocated prior to the sale of their Rhode Island home. Usually it is impossible to determine if a tax is due or how much is due until after the sale price of the home has been determined. Once a sale price has been established, paperwork can be filed to determine the extent, if any, of the liability.

Sellers can usually consider that Rhode Island State taxes are due on a sale if Federal taxes are expected. Sales of investment properties with a gain or sales that exceed the maximum exemption for primary residence sales will normally have both federal and State Tax obligations. Conversation with your Tax professional is recommended if you have any question regarding you exemption status or tax liability.