1031 exchanges in Oregon

The Portland stack

Oregon's headline 9.9 percent is not the whole story if your property sits in the Portland metro area. Two local income taxes conform to the Oregon income base, and that base includes capital gains and depreciation recapture.

A large property sale pushes almost anyone into all of those brackets for one year, even a retiree whose ordinary income is modest. And nonresidents are not exempt. The Metro and Multnomah nonresident instructions both list the sale of property located in the district as a taxable local source, so moving to Vancouver does not remove the local tax on an Oregon property sale.

A Portland example

Thirty-five percent, on a property that cost $118,000. The state and local share alone is nearly $99,000. This is among the strongest cases for a 1031 exchange anywhere in the country.

Illustration using top-bracket assumptions for a Multnomah County resident. Run your own numbers →

The Oregon clawback and Form OR-24

Oregon is one of only four states — with California, Massachusetts, and Montana — that tracks deferred gain when you exchange out of state.

ORS 316.738 provides that when the out-of-state replacement property is eventually sold in a taxable transaction, you must add back to Oregon taxable income the difference between the property's adjusted basis and the lesser of its fair market value when the exchange was completed or its fair market value at disposition. The corporate parallel is ORS 317.327.

To make that enforceable, Oregon requires Form OR-24, "Oregon Like-Kind Exchanges/Involuntary Conversions."

• Required when Oregon property is exchanged for property outside Oregon. Not required for Oregon-to-Oregon exchanges.
• Filed for the year of the exchange and every year afterward until the replacement property is disposed of and the gain is reported to Oregon.
• A separate OR-24 is required for each exchange.
• Attaches to your OR-40, OR-40-N, or OR-40-P for individuals, or the corresponding return for entities.
• The obligation survives your move out of Oregon and continues through subsequent exchanges.

Withholding at closing, and the form you must not forget

Oregon requires the closing agent to withhold on sales by nonresident transferors. The amount is the smallest of:

• 4 percent of the consideration, or
• 8 percent of the gain includable in Oregon taxable income, or
• the net proceeds disbursed to you.

There is no separate 1031 exemption form and no 1031 exemption category. Oregon's guidance treats someone exchanging property as a transferor like any other. The relief is arithmetic rather than categorical: in a fully deferred exchange the gain includable in Oregon income is zero, so the 8 percent prong computes to zero and nothing is withheld.

But that only works if you affirmatively provide the gain computation on Form OR-18-WC at closing. If you do not supply it, the agent defaults to withholding 4 percent of the sale price. On a $780,000 sale that is $31,200 sitting with the state, recoverable only by filing a return, and potentially creating boot complications in the exchange.

Exemptions from withholding entirely include Oregon resident individuals, consideration of $100,000 or less, and situations where the amount withheld would be under $100.

Intermediary standards in Oregon

Oregon regulates exchange facilitators under legislation enacted in 2013, effective January 1, 2014. Requirements include:

• Fidelity bond of at least $1 million, or an equivalent deposit or letter of credit.
• Errors and omissions coverage of at least $250,000, or equivalent.
• Custody of exchange funds under a prudent investor standard emphasizing liquidity and preservation of principal.
• No commingling with operating funds, and no loans or transfers to affiliates outside a qualified exchange accommodation agreement.
• Change of control notice to clients within 10 business days.

As in Washington, there is no license and no registry. These are conduct standards, not gatekeeping. Do not describe an Oregon facilitator as "licensed," because none of them are.

How to vet an intermediary properly →

Transfer tax, and the Washington County exception

Good news, mostly. ORS 306.815 prohibits Oregon local governments from imposing real estate transfer taxes, except for any that were already operative on March 31, 1997.

Washington County is the only grandfathered jurisdiction. Its rate is $1.00 per $1,000 of selling price, or 0.1 percent, payable within 15 days of recording, with liability allocated between buyer and seller by agreement. A 1031 exchange does not appear on the county's exemption list, so a Washington County leg of an exchange is generally still subject to it.

At 0.1 percent this is minor — $780 on a $780,000 sale — but it should be on the closing statement rather than a surprise.

Your Oregon checklist

• Calculate the local taxes, not just the 9.9 percent. Metro SHS and Preschool for All can add up to 4 percentage points, and they reach nonresidents on Oregon property.
• Get Form OR-18-WC to the closing agent with the gain computation, or 4 percent of the price gets withheld by default.
• Decide in-state or out-of-state deliberately. Staying in Oregon avoids the clawback and the OR-24 obligation entirely.
• If you go out of state, calendar Form OR-24 permanently. Every year, indefinitely, even after you move.
• Engage the intermediary before closing and confirm they meet the 2013 bonding and E&O standards.
• Washington County property: budget the 0.1 percent transfer tax.
• Watch the late-year trap. File a return extension to preserve the full 180 days on a fall sale.