Tips for Nonresident Sellers

TIPS FOR NONRESIDENT SELLERS OF OREGON PROPERTY

Generally. Selling property in Oregon can cause a surprise or two for out-of-state owners. Oregon law provides for withholding of state income tax on certain real estate transactions of nonresident individuals and C corporations that do not do business in Oregon (for purposes of this post both will be referred to collectively as “Nonresidents”).

This law applies to transactions that are closed on or after January 1, 2008. Essentially, the amount withheld is a prepayment of the state income tax the Nonresident would be required to pay at tax time. It is not a “transfer tax” – or any other “extra tax” assessed against non- residents.

Oregon escrow companies closing real estate transactions are required to withhold the scheduled tax at the time of closing. This means that a portion of the seller’s net proceeds will be retained by escrow for transmittal to the Oregon Department of Revenue. As a result, all sellers of Oregon property are asked to provide escrow with one of the following:

Proof of residency in Oregon;
A completed Department of Revenue Form WC in which the seller certifies that they are exempt from Oregon’ withholding law; or
Other written assurance of Oregon residency.

If a seller of Oregon property is unable to establish that they live in Oregon full time, or they are not otherwise exempted (discussed below), escrow is required to withhold the tax due. It is calculated based upon the least of the following three amounts:

4 % of the sales price;
8 % of the gain from the sale; or
The net proceeds distributed to the seller.

Escrow is not required to withhold for: (a) Sellers who are Oregon residents, C corporations doing business in Oregon after the property sale; or (b) Pass-through entities such as certain partnerships, S-corporations, limited liability companies with more than one owner, limited liability partnerships, or certain trusts and estates.

Exemptions. However, even certain non-residents are exempt from the withholding law if they fall into any one of the following categories:

The sale price of the property is $100,000 or less;
The seller is an individual and a resident of Oregon;
The transferor is a C corporation that has a permanent place of business in Oregon;
The seller is a pass-through entity (as described above);
The seller is or will be involved in a tax deferred exchange under IRS Sections 1031 or 1033;
The seller has received advice from a tax professional that there is no tax due because the sale is exempted due to one of the following circumstances:
- It is a sale of a principal residence and the gain qualifies for exclusion under IRC §121 (the $250/$500,000 rule);
- It is a sale to a corporation controlled by the seller under IRC §351; o It is part of a tax-free reorganization under IRC §361;
- It is a sale by a tax-exempt entity under IRC §501(a) and it meets other criteria; o It is a sale to a partnership buyer in exchange for an interest in the partnership buyer such that no gain or loss is recognized under IRC §721;
- It is a sale between spouses or is part of a divorce under IRC §1041;
- It is a conveyance pursuant to a foreclosure or pre-foreclosure event between seller and lender;
- It is a sale resulting in no gain or a loss;
- It is fully exempt as explained in the Form WC (discussed above).

Conclusion. Out of state property owners should take this law seriously. The title company and escrow are not required to police sellers, and they won’t. The temptation to “fudge” on a certification might be strong – especially when the money would be withheld early in the tax year, long before it would ever have to be paid if there were no sale. However, telling a lie on a tax form could bring more problems than it is worth.