1031 Exchange & DST Investing in Rhode Island
Rhode Island taxes capital gains at a top rate of 5.99% and conforms to federal Section 1031, so a qualifying exchange defers both state and federal tax. The state also withholds on real estate sales by nonresidents at closing.
State tax treatment of a 1031 exchange
Rhode Island conforms to federal Section 1031, so a qualifying like-kind exchange defers Rhode Island income tax on the gain. Capital gains are taxed as ordinary income at a top marginal rate of 5.99%.
Rhode Island requires withholding on real estate sales by nonresident sellers, generally 6% of the gain for individuals, collected at closing unless reduced or exempted. A properly structured exchange may support relief from withholding. The state does not impose a separate clawback on deferred gain.
Market snapshot
Providence anchors Rhode Island's investment market with an eds-and-meds base around Brown University and area hospitals, plus steady multifamily demand in a supply-constrained market. The state's compact geography keeps rental demand concentrated and durable.
Coastal and Newport-area tourism supports a strong second-home and hospitality segment, and small industrial and commercial assets round out investor activity. Apartment owners looking to move from active management are a common source of 1031 replacement capital.
Why 1031 & DST investors look here
- A 5.99% top state rate on top of federal capital gains tax gives Rhode Island sellers a reason to defer
- Providence-area multifamily owners often want to exit hands-on management while preserving income
- DST and 721 structures offer diversification and estate-planning benefits beyond a single local property
Replacement-property options
Rhode Island exchanges do not require in-state replacement property. Accredited investors commonly identify DST interests, 721 UPREIT contributions, or Opportunity Zone investments elsewhere, trading a hands-on Rhode Island building for diversified, professionally managed real estate. These vehicles are illiquid, involve market and sponsor risk, and are available only to accredited investors.
Frequently asked questions
Does Rhode Island tax a 1031 exchange?
No. Rhode Island conforms to federal Section 1031, so a qualifying like-kind exchange defers Rhode Island income tax on the gain along with the federal tax.
Can I exchange Rhode Island property for out-of-state DSTs?
Yes. Section 1031 does not require in-state replacement property, so a Rhode Island property can be exchanged into DST interests holding real estate in other states, subject to accredited-investor eligibility.
Does Rhode Island withhold tax when a nonresident sells real estate?
Yes. Rhode Island generally withholds 6% of the gain for nonresident individuals at closing, but a qualifying exchange may support a reduced or waived withholding if requested from the Division of Taxation beforehand.
Gerald F. “Jerry” Baker, III — Founder & Managing Principal, Baker 1031 Investments · FINRA Series 22 / 63 · SIE. Read full bio →
State tax treatment is general and changes frequently; this page is educational and is not tax, legal, or investment advice. Confirm current state and local rules with your own CPA and attorney. Securities offered through Aurora Securities, member FINRA/SIPC. Real estate investments involve risk, including possible loss of principal.