Oregon requires a withholding of tax on certain real estate transactions of nonresident individuals and C corporations that do not do business in Oregon
Oregon Revised Statute 314.258 (2007 Enrolled House Bill 2592) provides for withholding of tax on certain real estate transactions of nonresident individuals and C corporations that do not do business in Oregon. This law applies to conveyances that occur on or after January 1, 2008.
1. What is real estate withholding?
Real estate withholding is a pre-payment of tax paid on behalf of certain Oregon taxpayers selling property in Oregon.
2. Is real estate withholding an additional tax on the sale of Oregon real property?
No. The withholding tax is not an additional tax due but instead a pre-payment of tax, like estimated payments, of a personal or corporate tax based on income.
3. What is the withholding calculation?
The withholding required is the least of three amounts:
- 4 percent of the consideration (sales price);
- 4 percent of the net proceeds (amount disbursed to the seller); or
- 10 percent of the gain that is includible in Oregon taxable income for the year.
4. When is withholding required?
Generally, withholding is required when nonresident individuals or C corporations sell property located in Oregon if the sales price is greater than $100,000. Other exceptions to the withholding requirement may apply. See question 16 below.
5. When is withholding not required?
Withholding is not required if the seller is a pass-through entity such as a partnership, S corporation, limited liability company (LLC), limited liability partnership (LLP), or certain trusts and estates. Withholding is also not required if the seller meets an exemption to the withholding.
6. Is withholding required on a grantor trust?
Yes. A grantor trust is not recognized for tax purposes because the grantor retains substantial control.
7. What is a “seller”?
A seller, also known as a transferor, is a person who transfers, sells, deeds, or otherwise conveys real property to another person.
9. If the seller moves into or out of Oregon during the year, is withholding still required?
Yes. Withholding is required if the sale occurred or the proceeds were disbursed during the part of the year that the transferor was not a resident of Oregon.
10. Can sellers whose withholding payment is more than their tax liability get an early refund?
No. Excess withholding cannot be refunded until the tax return is filed.
11. Does withholding relieve taxpayers from the requirement to file an Oregon return?
No. The seller is still required to file the Oregon personal income tax return, corporate income tax, or excise tax return, whichever is applicable, by the due date of the return.
12. If the taxpayer is exempt from withholding, does that mean they don’t have to file an Oregon return?
No. A taxpayer who sells property located in Oregon must pay tax to Oregon on the income from the sale of that property. If the taxpayer is also taxed by another state, they may be eligible for a credit in their state of residence for income taxes paid to Oregon. Special rules apply for residents of California, Arizona, Indiana, and Virginia. See Forms 40N or 40P, Part-Year Residents and Nonresident instructions for more information.
13. Who is responsible for completing the forms related to this new law?
The transferor is responsible for completing the forms related to this new law. The Form 40-WE is used to claim exemption from withholding and the Form 40-CW is used to calculate the amount of withholding required.
14. Is the real estate escrow person responsible to verify any of the amounts shown on the department forms?
No. The authorized agent (escrow person) is not responsible to verify what the transferor claims. The transferor is certifying under penalty of perjury that the statements he or she is making are true.
15. Who must withhold?
The authorized agent handling the transaction must withhold at the time funds are disbursed to the seller. The authorized agent is generally the escrow officer, but is also a qualified intermediary in IRC §1031 exchanges.
16. What are the exemptions from withholding?
Withholding is not required if:
- The consideration for the property conveyed is $100,000 or less;
- The transferor is an individual and resident of Oregon;
- The transferor is a C corporation that has a permanent place of business in Oregon;
- The transferor intends to defer tax on the gain under Internal Revenue Code (IRC) §1031 or §1033 and, at the time of closing, the property is eligible for such treatment.;
- The transferor has received advice from a tax professional that there is no tax estimated to be due because the conveyance is:
• The sale of a principal residence and the gain qualifies for exclusion under IRC §121.
• A transfer to a corporation controlled by the transferor for purposes of IRC §351.
• A transfer pursuant to a tax-free reorganization under IRC §361.
• A transfer by a tax-exempt entity for purposes of IRC §501(a) and the transfer does not give rise to unrelated business taxable income under IRC §512.
• A transfer to a partnership in exchange for an interest in the partnership such that no gain or loss is recognized under IRC §721.
• Between spouses or is incident to divorce for purposes of IRC §1041.
• A transfer where the transferor is conveying the property subject to a mortgage, trust deed or land sale contract to a mortgagee, trust deed beneficiary, or land sale contract vendor as part of a foreclosure action, a non-judicial foreclosure, or forfeiture proceeding, or a transfer by a mortgagor, trust deed grantor, or land sales contract vendee in lieu of a foreclosure, with no additional consideration.
• A transfer that results in zero gain or a loss and there is expected to be no tax owed on the conveyance.
• Fully exempt from the recognition of gain under ORS chapter 316, 317, or 318 as explained to the department in writing at the time the transaction is completed (attach explanation to the Form 40-WE).
17. What form do sellers use to certify they are exempt from withholding?
Use Form 40-WE to certify under penalty of perjury that the transferor is exempt from withholding.
18. Does the law always require withholding when the sellers do not qualify for any of the exemptions?
Yes. However, even if the seller does not meet an exemption, the calculation of withholding may still result in zero withholding. For example, if a property is highly leveraged (e.g. the debt on the property is equal to the sales price plus ordinary closing costs), withholding would not be required because net proceeds disbursed to the seller would be zero.
19. Once the Form 40-CW or Form 40-WE are completed, should they be sent to the department?
Not necessarily. The Form 40-CW is simply a calculation for the transferor to prepare for the authorized agent’s purpose. If there is an explanation needed about the amount remitted, the authorized agent and the transferor may wish to provide this information to the department at that time, but it is not required.
In addition to special requests made by the department, the Form 40-WE is required to be sent to the department in three standard situations. The form should be mailed to us if the transferor claims to be exempt from withholding because:
- They are a resident of Oregon but have a non-Oregon address;
- They are a C corporation doing business in Oregon, yet the information available to the authorized agent indicates otherwise; or
- They intend to enter into a tax deferral under IRC §1031 or §1033.
Mail the Form 40-WE to:
Oregon Department of Revenue
955 Center Street NE
Salem, OR 97301-2555
20. Can sellers who have a lower tax liability apply for reduced withholding?
No. You cannot offset other items to reduce the withholding required. You may however, be eligible for a refund once you file your return.
21. Does the law required withholding on the sale of a principal residence?
Yes, but only on the amount of gain that exceeds the federal exclusion amount. For joint filers, the exclusion is $500,000. For all others, it is $250,000. Use Form 40-CW to compute the correct amount of withholding.
Reprinted from the Oregon Department of Revenue Web site at: http://www.oregon.gov/DOR/PERTAX/nonresident_withholding.shtml
Caveat: Tax laws are fluid and often vary on the specific circumstances of the taxpayer. Please contact the Oregon Department of Revenue or your tax professional if you have questions or need further assistance.