Capital Gains Tax on Home Sales in Rhode Island

When selling a home, the profit you make is a capital gain and can be subject to taxation. For homeowners in Rhode Island, this gain may be taxed at both the federal and state levels. The amount of tax owed depends on the size of the gain, your income, and how long you owned and lived in the property. Federal and state tax systems provide specific exclusions that can reduce or eliminate this tax liability for many homeowners.

Federal Capital Gains Exclusion for Primary Residences

A provision in the U.S. tax code, the Section 121 exclusion, allows many homeowners to avoid paying taxes on the profits from selling their main home. This rule permits a single individual to exclude up to $250,000 of gain, while a married couple filing a joint tax return can exclude up to $500,000. If your profit is below these thresholds, you likely will not owe any federal capital gains tax on the sale.

To be eligible for this tax benefit, homeowners must satisfy two primary tests. The Ownership Test requires that you have owned the home for at least two of the five years leading up to the sale date. The Use Test mandates that you have lived in the home as your primary residence for at least two of the five years before the sale. These two-year periods do not need to be continuous.

The IRS recognizes that not everyone can meet the two-year requirements due to unforeseen events. In such cases, you may still qualify for a partial exclusion for a change in your place of employment, specific health-related reasons, or other unexpected circumstances. A partial exclusion is calculated based on the portion of the two-year period you did meet the requirements.

This exclusion is generally available only once every two years. If you sold another home and used the exclusion within the two-year period before the current sale, you would not be eligible to use it again. There are special rules for certain individuals, such as members of the military, who may be able to suspend the five-year test period while on active duty.

Calculating Your Home’s Taxable Gain

To determine the taxable amount from your home sale, you must first calculate your realized gain. The basic formula is the home’s selling price minus your selling expenses and the property’s adjusted basis. This process requires careful record-keeping of all costs associated with buying, improving, and selling the property.

Deductible selling expenses are the direct costs incurred to sell the home and reduce the total amount of profit you are considered to have made. Common examples include:

• Real estate brokerage commissions
• Advertising fees
• Legal fees paid for assistance with the closing
• Costs for title insurance

The most complex component is the adjusted basis. Your starting point is the “basis,” which is generally what you originally paid for the property. This amount is then increased by the cost of any capital improvements, which are investments that add value to the home, prolong its life, or adapt it to new uses. Examples include:

• A new roof
• A kitchen or bathroom remodel
• A room addition
• A new heating and air conditioning system

In contrast, general maintenance and repairs, such as painting a room or fixing a leaky faucet, do not increase your adjusted basis. Certain items can also decrease your basis. If you ever claimed depreciation deductions for a home office or used the property as a rental, these amounts would be subtracted from your basis.

Determining the Applicable Tax Rates

Federal Tax Rates

The federal tax rate applied to your home sale profit depends on how long you owned the property. If you owned the home for one year or less, the gain is considered short-term and is taxed at your ordinary income tax rates. However, since most home sales involve properties owned for much longer, the gain is typically classified as long-term.

Long-term capital gains benefit from lower tax rates, which are 0%, 15%, or 20%. The specific long-term rate you pay is determined by your total taxable income for the year, including the gain from the home sale. For 2024, single filers with a taxable income of up to $47,025 and married couples filing jointly with income up to $94,050 fall into the 0% bracket.

The 15% rate applies to single filers with incomes between $47,025 and $518,900 and married couples with incomes between $94,050 and $583,750. The highest earners, with incomes above those thresholds, will pay the 20% rate. Some high-income taxpayers may also be subject to an additional 3.8% Net Investment Income Tax.

Rhode Island State Tax

Rhode Island does not have a separate, preferential tax rate for long-term capital gains. Any taxable profit from your home sale is treated as ordinary income and is subject to the state’s standard income tax rates. This means the distinction between short-term and long-term gains does not affect your state tax liability.

Rhode Island uses a progressive income tax system with three brackets. For the 2024 tax year, the rates are 3.75% on taxable income up to $77,450, 4.75% on income between $77,451 and $176,050, and 5.99% on income exceeding $176,050. The taxable gain from your home sale is added to your other income, and the total is taxed according to these brackets.

Reporting the Home Sale on Your Tax Returns

You are generally required to report the sale of your home on your federal tax return if you receive a Form 1099-S, Proceeds From Real Estate Transactions, or if your gain exceeds the exclusion amount you are eligible for. Even if you don’t owe any tax, receiving a Form 1099-S means the IRS has been notified of the sale, and you must report it to show that you qualify for the exclusion. The primary forms for this purpose are Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D.

The process begins with Form 8949, where you will detail the specifics of the transaction, including the property’s sale price, its cost basis, and any adjustments to calculate the gain or loss. After completing Form 8949, you will transfer the totals to Schedule D, which summarizes all your capital gains and losses for the year. The final figure from Schedule D is then carried over to your main tax form, Form 1040.

For your state taxes, the process is more direct. Rhode Island’s state income tax return, Form RI-1040, uses your federal Adjusted Gross Income (AGI) as its starting point. Since the taxable portion of your home sale gain is already included in your federal AGI, it automatically flows into your state tax calculation. There are no separate state-level forms specifically for reporting capital gains from a home sale.