Rhode Island Form RI 71.3 Election and the 1031 Exemption

The buyer withholds on net proceeds unless you bring a certificate

The statute puts the duty on the buyer, not the closing attorney. R.I. Gen. Laws section 44-30-71.3 says that in a sale of real property owned by a nonresident "the buyer shall deduct and withhold on the payments an amount equal to six percent (6%) of the total payment to nonresident individuals, estates, partnerships, or trusts, and seven percent (7%) of the total payment to nonresident corporations."

"Total payment" is defined in subsection (b) as "the net proceeds of the sale actually paid to the nonresident seller, including the fair market value of any property to be transferred to the seller." The regulation fills in what comes off the price: mortgages, liens and selling expenses such as commissions, attorney's fees, conveyance tax stamps and inspection fees required of the seller.

Subsection (f) excludes the closing attorney, lending institution and broker from the withholding duty, and subsection (c) makes the buyer liable for anything that should have been withheld. Until it is remitted, the amount is a lien on the property, which is why every Rhode Island closing agent treats this form as a title matter rather than a tax nicety.

Form RI 71.3 Election switches the base from net proceeds to gain

The default is the net proceeds method: 6% of everything that would otherwise be wired to you. The alternative is the gain method, and it is only available if you ask for it in advance. Regulation 280-RICR-20-10-1 states that "the nonresident seller must first make the election by completing RI Form 71.3 Election and submit the completed form to the Division of Taxation for review at least twenty (20) days prior to the closing date."

If the Division agrees with the gain shown, it issues a Certificate of Withholding Due, Form RI 71.3 Certificate, which is "sent to the seller or designee." The buyer withholds the certificate amount instead of 6% or 7% of net proceeds. Without the certificate at the table, the buyer has no authority to withhold less than the statutory percentage.

The twenty-day clock is measured from receipt by the Division, so a form mailed on day 21 does not work. Rhode Island is one of several states that make the exchange affidavit a pre-closing filing; the others are compared on exemption filing deadlines by state.

An exchange still needs the election, showing zero gain

The compliance section of the regulation names the nonrecognition provisions directly. Where a nonresident's sale will not be subject to tax under sections 121, 721, 1031, 1033 or 408 of the Internal Revenue Code, the seller must still file the RI 71.3 Election "even though no withholding need be made." The form is where you describe the exchange, name the qualified intermediary and show the gain as deferred.

Filing it carries a promise. The seller "acknowledges obligation to file an original or amended Rhode Island tax return for the year of the sale" if the exchange later fails to meet section 1031. The state gives up withholding at closing in return for your signature on that acknowledgment.

The buyer's side does not disappear either. The regulation requires that an RI 71.3 Remittance form "must be completed for the nonresident and sent to the Division even though the results of the withholding calculation are that no withholding is to be made." Ask the closing attorney for a copy of the zero remittance for the exchange file; the general sequence of certificates is on state withholding at closing in a 1031 exchange.

Boot and a collapsed exchange are where withholding comes back

The gain method withholds on the gain you will actually recognize. If you plan to take cash at closing, that boot produces recognized gain, and the certificate will reflect it. Hypothetical: a nonresident sells a Providence rental for $1,000,000 with net proceeds of $900,000 and intends to keep $60,000 outside the exchange. Under the net proceeds method the buyer would hold back $54,000; with an approved election the certificate limits withholding to 6% of the recognized gain, roughly $3,600 if the whole $60,000 is gain. Run your own numbers with your CPA.

What counts as boot, including debt relief that is not replaced, is explained on what boot is in a 1031 exchange. If the Division has already issued a certificate and you later decide to take more cash, tell the closing attorney before the deed records; the buyer is liable for the shortfall.

If the exchange collapses after closing, nothing is withheld at that point because the money is already with the intermediary. The acknowledgment on the election form governs: you file the Rhode Island return for the year of sale and pay the tax, with the federal timing questions covered on when the QI releases funds after a failed exchange.

The sequence for the closing file

Under subsection (e) of the statute, amounts withheld are treated as paid on your behalf and credited "for the taxable year beginning in that calendar year," so any withholding that does occur is recovered on the Rhode Island nonresident return rather than by refund request. The payment section of the regulation adds that filing and paying the withholding automatically discharges the statutory lien, and the buyer can request an acknowledgment on the reverse of the remittance form.

Rhode Island's conveyance tax on the deed is a separate charge that no exchange removes; it is covered with the state's income tax treatment on 1031 exchange rules in Rhode Island. The withholding states as a group, with their forms and rates, are tabled on which states withhold at closing.

• Day 21 or earlier before closing: RI 71.3 Election received by the Division with the exchange agreement attached.
• Before closing: Certificate of Withholding Due received by you or your designee and delivered to the buyer's attorney.
• Closing: buyer withholds the certificate amount, zero on a clean exchange, and the balance goes to the qualified intermediary.
• Within three banking days: buyer files the RI 71.3 Remittance form, even at zero.
• Following spring: nonresident Rhode Island return filed; any withholding claimed as a payment for that year.