Oregon is one of the states that charge an inheritance tax. This is a tax on the heirs or beneficiaries of property transfers from an estate. It is different from the federal and state estate taxes, which are levied on the estate. In Oregon, the inheritance tax applies when a decedent’s estate has a taxable value of over $1,000,000. Inheritance tax rates range from 0.8% to 16% depending on the value of the estate.
Taxable property
The property subject to the Oregon inheritance tax depends on whether the decedent was a resident or nonresident of Oregon. For an Oregon resident, real and tangible personal property located in Oregon and intangible personal property wherever located is subject to the inheritance tax, after taking into account the $1,000,000 exemption. Real and tangible personal property located outside Oregon is not taxable.
For a decedent who was not a resident of Oregon, only real property, tangible personal property, and intangible personal property located in Oregon is taxable. According to the Oregon Department of Revenue, an exemption is allowed for intangible personal property located in Oregon if a like exemption is allowed by the state in which the decedent resided.
Property subject to the Oregon inheritance tax includes real estate, cash, stocks and bonds, mortgages and notes owed to the decedent, insurance on the decedent’s life, jointly owned property, certain transfers during the decedent’s life, powers of appointment, and annuities.
Natural resource or fishing business property credit
In 2008 the Oregon Legislature passed a bill that provides a credit for natural resource property (land for farm use and forestland) or fishing business property passed to a family member or registered domestic partner. The law became effective May 23, 2008 and applies retroactively to deaths on or after January 1, 2007.
In order to claim this credit, the total adjusted gross estate cannot be more than $15 million, and the natural resource property or fishing business property must be at least 50% of the adjusted gross estate. During a total of five out of the eight years prior to the decedent’s death, the decedent, a member of the family, or the decedent’s registered domestic partner must have owned and used the property for farm or forestry purposes. And, at least one member of the decedent’s family or the decedent’s registered domestic partner must continue to use the property for fishing or forestry purposes for at least five out of the eight years following the decedent’s death.
Property qualifying for the natural resource or fishing business property credit includes timber, trees, and improvements; crops, both growing and stored; forestry and farming equipment; boats, gear, equipment, and licenses; equipment used to process and sell the catch of a fishing business; and the working capital of the business.
Valuation
All property includible in the decedent’s gross estate must be valued as of the date of death, unless the alternate valuation date is elected by the estate’s personal representative. If the alternate valuation date is elected, any property distributed, sold, or otherwise disposed of within six months after the decedent’s death is valued on the date of distribution, sale, or disposal. Any property not distributed, sold, or disposed of is valued on the date six months after the date of the decedent’s death.
Farm property and real property in a closely held business can be valued at its farm or business use value instead of its fair market value. There is a special use valuation and an alternate valuation method. In order to elect the special use valuation, the decedent or a member of the family must have materially participated in the operation of the farm or business for at least five of the eight years prior to the decedent’s death.
Qualified real property for purposes of the special use valuation includes roads, buildings, and other structures and improvements related to operating the farm or business, and residential buildings and structures occupied or used by the owner or lessee.
The primary special use method for farm property is the annual gross cash rental method. According to this method, you would start with the average annual gross cash rental for actual tracts of comparable property in the same locality. Then you subtract the average annual state and local real estate taxes on those tracts. The result is divided by the average annual effective interest rate charged for all new Federal Land Bank loans, to determine the special use value of the farm property. The computation of each average annual amount is based on the five calendar years before the decedent’s death.
If there is no comparable land for using the annual gross cash rental method for a farming business, or to value an interest in another type of closely held business, there are other alternate valuation methods. The factors to be considered include the capitalization of income that the property can be expected to generate for farming or closely held business purposes over a reasonable period of time, the capitalization of the fair rental value of the land, and comparable sales of other farm or closely held business land in the same geographical area
Deductions
The deductions that can be claimed in determining the net value of the estate subject to inheritance taxes include mortgages and other debts of the decedent, funeral expenses, expenses incurred in administering estate property, bequests to the surviving spouse, charitable bequests, and a deduction for an interest in a qualified family-owned business.
There is also a unified credit of $345,800 for estates of decedents dying after December 31, 2005. This credit reduces the amount of the net estate subject to the Oregon inheritance tax.
Filing the Oregon inheritance tax return
The executor of the decedent’s estate is responsible for filing the Oregon inheritance tax return. The return must be filed and the inheritance taxes paid within nine months from the date of the decedent’s death. The Oregon Inheritance Tax Return is filed using Form IT-1. If the natural resource or fishing business property credit is claimed, Schedule NRC must be completed. These forms are available for download from the Oregon Department of Revenue website at www.oregon.gov/DOR/BUS/forms.
According to the Oregon Department of Revenue, there is a 5% penalty for not filing the return by the due date, and an additional 20% penalty if the return is filed more than three months after the original or extended due date.
There is also a delinquency penalty of 5% of the amount of the tax due if the tax is not paid within nine months. An extension of the time to file the return can be requested, but this does not extend the time to pay the tax, and interest accrues on the unpaid balance of tax owed after nine months. But an installment plan can be requested.
Sources:
Oregon Department of Revenue – Oregon Inheritance Tax: www.oregon.gov
Oregon State Bar – What Taxes Have To Be Paid When Someone Dies? www.osbar.org
State of Oregon – Form IT-1 – Inheritance Tax: www.oregon.gov
Reference:
- Oregon Department of Revenue – Oregon Inheritance Tax: www.oregon.gov
