1031 Exchange in Rhode Island
Rhode Island follows federal Section 1031 like-kind exchange rules, so state income tax on the gain is deferred alongside federal tax in a properly structured exchange. The main state-specific step is the non-resident real estate withholding regime under R.I. Gen. Laws § 44-30-71.3: buyers must withhold 6% of the total payment to a non-resident individual seller (7% for corporations) unless the seller files RI Form 71.3 before closing — a fully qualifying 1031 exchange results in a certificate showing zero withholding due. Rhode Island taxes capital gains as ordinary income at rates of 3.75% to 5.99%, with a new surcharge on taxable income over $1 million phasing in beginning in tax year 2027.
Fast Facts
- State Income Tax Rate
- 3.75% - 5.99% Rhode Island has a progressive income tax with three brackets (3.75%, 4.75%, 5.99%). A surcharge on taxable income over $1 million, enacted in June 2026, phases in by one percentage point per year starting in tax year 2027, bringing the top rate to 8.99% when fully phased in.
- Conforms to Federal 1031
- Yes Rhode Island's income tax starts from federal adjusted gross income and follows federal 1031 exchange treatment without state-specific modifications.
- Non-Resident Withholding
- 6% of the total payment (7% for corporations) Under R.I. Gen. Laws § 44-30-71.3, buyers must withhold on sales by non-resident sellers. Sellers completing a qualifying 1031 exchange must file RI Form 71.3 Election before closing; the Division of Taxation then issues a certificate showing zero withholding due.
- State Capital Gains Tax
- Same as ordinary income Rhode Island taxes capital gains at the same rates as ordinary income.
- Local Property Taxes
- Varies by municipality Property tax rates are set locally and vary significantly across Rhode Island's 39 cities and towns; check the municipality's current rate before acquiring a replacement property.
Legislative Updates
Surcharge on Income Over $1 Million Enacted
Rhode Island's FY2027 budget (H 7127), signed in June 2026, adds a surcharge on taxable income over $1 million, phasing in at one percentage point per year beginning in tax year 2027 and reaching 3% (a top combined rate of 8.99%). Because Rhode Island taxes capital gains as ordinary income, this raises the stakes of recognizing a large gain versus deferring it through a 1031 exchange for high-income sellers.
Federal Conformity
Rhode Island continues to conform to federal 1031 exchange rules without state-specific modifications, providing a straightforward environment for investors.
Non-Resident Withholding Requirements
Non-resident sellers remain subject to withholding of 6% of the total payment (7% for corporations) under R.I. Gen. Laws § 44-30-71.3 unless they file RI Form 71.3 Election before closing. A sale that fully qualifies under IRC Section 1031 results in a certificate showing zero withholding due.
Legal and Tax Considerations
State Income Tax Rate
3.75% - 5.99% Three brackets (3.75%, 4.75%, 5.99%). A surcharge on taxable income over $1 million phases in starting in tax year 2027, reaching a top rate of 8.99% when fully phased in.
Conforms to Federal 1031
Yes Rhode Island follows federal 1031 exchange treatment; gain deferred federally is also deferred for Rhode Island income tax purposes.
Non-Resident Withholding
6% of the total payment (7% for corporations) Buyers must withhold on sales by non-resident sellers under R.I. Gen. Laws § 44-30-71.3. Filing RI Form 71.3 Election before closing for a qualifying 1031 exchange results in a zero-withholding certificate.
State Capital Gains Tax
Same as ordinary income Rhode Island taxes capital gains at the same rates as ordinary income.
Local Property Taxes
Varies by municipality Property tax rates are set locally and differ significantly among Rhode Island's cities and towns.
Required Documentation
- Federal Form 8824
- Rhode Island Form RI-1040
- RI Form 71.3 Election and Certificate of Withholding Due (non-resident sellers)
Clawback Rule
None
Step-by-Step Process
- 1
Identify Replacement Property
You must identify potential replacement properties within 45 days of selling your relinquished property. In Rhode Island, consider municipal property tax rates and local zoning regulations when identifying properties.
- 2
Engage a Qualified Intermediary
Work with a qualified intermediary before closing on your relinquished property. Rhode Island follows federal 1031 exchange rules, and your intermediary's exchange documentation supports the non-resident withholding exemption filing if you live out of state.
- 3
Non-Resident Withholding Exemption
If you are a non-resident seller, file RI Form 71.3 Election with the Rhode Island Division of Taxation before closing, indicating the sale qualifies under IRC Section 1031. Otherwise the buyer must withhold 6% of the total payment (7% for corporations). A qualifying exchange results in a certificate showing zero withholding due.
- 4
Close on Replacement Property
Complete the purchase of your replacement property within 180 days of selling your relinquished property (or by your tax return due date, if earlier).
- 5
File Tax Returns
Report your 1031 exchange on your federal tax return using Form 8824. For Rhode Island state taxes, report the exchange on your Rhode Island Form RI-1040, following federal treatment.
- 6
Review Local Regulations
Review local zoning regulations and development codes, which vary between Rhode Island municipalities, and check Coastal Resources Management Council (CRMC) requirements for coastal properties.
Timeline Calculator
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Common Pitfalls
Overlooking non-resident withholding requirements
Issue
Non-resident sellers who fail to file RI Form 71.3 Election before closing face withholding of 6% of the total payment (7% for corporations), tying up exchange funds until a Rhode Island return is filed.
Prevention
File RI Form 71.3 Election with the Division of Taxation well before closing, with your qualified intermediary's exchange documentation attached. Confirm the closing agent has the resulting certificate in hand at closing.
Coastal property considerations
Issue
Coastal properties in Rhode Island can carry additional costs and regulatory requirements that affect their suitability as replacement property.
Prevention
Research flood insurance requirements and costs. Review Coastal Resources Management Council (CRMC) regulations and building restrictions before identifying a coastal replacement property.
Missing the identification and closing deadlines
Issue
The 45-day identification and 180-day closing deadlines are federal, calendar-day deadlines with no extensions for weekends, holidays, or slow local closing timelines.
Prevention
Calendar both deadlines the day your relinquished property closes and build your search and financing timeline backward from them.
Frequently Asked Questions
How does Rhode Island’s non-resident withholding affect 1031 exchanges?
Under R.I. Gen. Laws § 44-30-71.3, when a non-resident sells Rhode Island real estate the buyer must withhold 6% of the total payment (7% if the seller is a corporation). If the sale is part of a qualifying 1031 exchange, the seller must file RI Form 71.3 Election with the Division of Taxation before closing, indicating the transaction will not be subject to tax under IRC Section 1031; the Division then issues a certificate showing zero withholding due. Failing to file means funds are withheld at closing and held by the state until you file a Rhode Island tax return.
Does Rhode Island tax capital gains differently from ordinary income?
No. Rhode Island taxes capital gains at the same rates as ordinary income — currently 3.75%, 4.75%, and 5.99% across three brackets. A surcharge on taxable income over $1 million, enacted in June 2026, phases in starting in tax year 2027 and will bring the top rate to 8.99% when fully phased in. In a properly structured 1031 exchange, the state tax on your gain is deferred along with the federal tax.
How do Rhode Island’s property taxes affect investment returns?
Property tax rates are set by each of Rhode Island’s 39 cities and towns and vary significantly. Some municipalities offer tax stabilization agreements for qualifying development projects, and periodic revaluations can change your bill, so research the local rate, assessment practices, and appeal procedures for any replacement property you are considering.
What unique considerations exist for coastal properties in Rhode Island?
Coastal properties in Rhode Island require careful consideration of flood insurance requirements, Coastal Resources Management Council (CRMC) regulations, and potential climate impacts. Insurance costs can be significant, and certain areas may have building restrictions or require special permits for improvements. Factor these costs into your analysis before identifying a coastal replacement property.
Major Cities
Providence, Warwick, Cranston, Pawtucket, East Providence, Woonsocket, Newport, Central Falls, Westerly, Cumberland
References
Official References
- Rhode Island Division of Taxation
- R.I. Gen. Laws § 44-30-71.3 — Sale of real property by nonresidents, withholding requirements
- 280-RICR-20-10-1 — Withholding Tax on the Sale of Real Property by Nonresidents
- RI Division of Taxation — Nonresident Real Estate Withholding Forms
- IRS — Like-Kind Exchanges (Form 8824 instructions)
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.