Chapter § 55.15 STATE TAXATION OF EXCHANGES

• Jurisdiction: Oregon

§ 55.15 STATE TAXATION OF EXCHANGES

Most states with an income tax follow the provisions of IRC section 1031. In structuring any exchange, exchange counsel must check state-law income-tax provisions to determine if the exchange will be tax-free under state law.

§ 55.15-1 Replacement Real Property Located Outside of State

In many states, if the like-kind property is real estate, the relinquished property is located in state, and the replacement property is located in another state, the transaction will be taxable for state-law purposes. Unless a state taxes such a transaction, the state will have a difficult time collecting the tax when the foreign replacement property is ultimately sold.

§ 55.15-2 Oregon

Beginning on October 6, 2001, subject to filing a deferral election, Oregon conformed its tax-free exchange laws to federal income-tax laws. Or Laws 2001, ch 509, §§ 14-21.

Generally, Oregon will not tax the exchange of Oregon relinquished property in a tax-free exchange if the replacement property is not in Oregon. When the replacement property is ultimately sold, however, Oregon tax will be due on the gain that would have been recognized on the sale of the original relinquished property. If the replacement property sells for less than it was purchased for, the gain will be reduced. The Oregon Department of Revenue is authorized to require taxpayers who defer gain in this manner to file an annual report with the Oregon Department of Revenue. ORS 316.738, ORS 317.327. See Oregon Form 24, available at www.oregon.gov/dor/pertax/pages/formspit.aspx >. This allows the department to track taxpayers who have invested in out-of-state property as part of a tax-free exchange.

The actual wording of the statute is a little more complicated. It provides that Oregon will tax the sale of the replacement property when it is sold. The gain will be the difference between the basis of the replacement property and the lesser of (1) the fair market value of the replacement property on the date on which the taxpayer acquired it, or (2) the fair market value of the replacement property on the date on which the replacement property is sold. If this difference produces a loss, the taxpayer can deduct the loss on his or her Oregon return. ORS 316.738(1)-(2), ORS 317.327(1)-(2).

EXAMPLE: A taxpayer sells Oregon relinquished property with a basis of $300,000 for $500,000. If the taxpayer does not complete a tax-free exchange, its taxable gain will be $200,000. But the taxpayer

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