Deciding whether to pull up stakes and change residency is often a difficult decision for individuals and families. Yet, it is a decision that Oregonians often face when selling stock because of the income tax consequences of remaining an Oregon resident. An installment sale of stock may allow an Oregon resident more time to decide whether and when to change residency.
As most Oregonians know, Oregon income tax rates are near the highest in the country, yet our neighbors – Washington and Nevada – have none.
Generally, stock is treated as an intangible asset and gain recognized on the sale of stock is taxable in the state of the selling taxpayer’s residency. With limited exceptions, an Oregon resident taxpayer may avoid Oregon income taxes on the sale of stock of a corporation by changing residency to another state before recognizing the gain.
But, what if a taxpayer sells stock on the installment method while an Oregon resident, then changes residency and collects the installment payments as a nonresident of Oregon? Is the gain treated as Oregon source income because the taxpayer was an Oregon resident at the time of sale? Or, is the source of the income determined at the time of collection when the taxpayer is a nonresident?
Under the installment method, a taxpayer recognizes gain on the sale as each installment payment is received. The gain retains its character as gain on the sale of an intangible asset. Accordingly, the gain should be subject to tax in the state of the taxpayer’s residency at the time of receipt of an installment payment. If the taxpayer is an Oregon nonresident at that time, the gain should not be subject to Oregon income taxes. (The Oregon Department of Revenue has confirmed this result in an informal opinion).
An installment sale could give an Oregon resident more time to decide whether and when to change residency to avoid Oregon income taxes on the sale of stock. Taxpayers could even change residency midstream. Installment payments received while an Oregon resident would be subject to Oregon income taxes. Payments received while a nonresident should not be subject to Oregon income taxes.