We recently posted about the federal tax consequences of owning a vacation home. This post explores a possible Oregon tax consequence for non-Oregon residents who own vacation property in Oregon. Considering moving outside of Oregon? This post also lays out some factors the Oregon Department of Revenue considers when determining your state of residency.
Let’s dive right in. Dan and Sheila live in Vancouver where they own a home and have been raising their children for over a decade. Their kids attend Clark County schools, and both Dan and Sheila are active in the community. Dan commutes to Portland on a daily basis and recently received a bonus from his firm. He and his family have always enjoyed vacationing in Sunriver, Oregon, and they have decided to use his bonus to purchase a home there. They intend to use the home on weekends, as well as for spring, summer and Christmas breaks. While Dan never intended to change his state of residency, a strict interpretation of ORS 316.027 would allow Oregon to tax him as a resident of the state. This would result in all of Dan’s income as being taxable in Oregon and would not be limited to the wages he earns in the state.
Generally, only individuals domiciled in Oregon are treated as residents of the state for income tax purposes. Domicile is generally defined as the place a person considers to be their true, fixed, permanent home. A domicile is the place a person intends to return to after an absence and you can only have one domicile at a given time. It continues as the domicile until the person demonstrates an intent to abandon it and acquire a new domicile, and later actually resides in the new domicile. Factors that contribute to determining domicile include family, business activities and social connections.
For example, assume Ron maintains a home in Oregon and works in Oregon. He purchased a summer home in Nevada and each year thereafter spent about three or four months in that state. He continued to spend six or seven months of each year in Oregon. He, also, continued to maintain his home and his social, club and business connections in Oregon, but he established his bank accounts in Nevada. During the months not spent in Nevada or Oregon he spent traveling in other states or countries. Ron is domiciled in Oregon and is taxed as a resident of Oregon because he has not demonstrated intent to abandon his Oregon domicile nor has he shown intent to make Nevada his permanent home.
However there is a provision in the Oregon statutes that allows the state to treat individuals as residents even if their domicile is outside of Oregon. ORS 316.127(1)(a)(B) expands the definition of an Oregon resident to:
“An individual who is not domiciled in this state(Oregon) but maintains a permanent place of abode in this state and spends in the aggregate more than 200 days of the taxable year in this state unless the individual proves that the individual is in the state only for a temporary or transitory purpose.”
A “permanent place of abode” is defined as a dwelling permanently maintained by an individual, whether or not they own it, and generally includes a dwelling place owned or leased by the taxpayer’s spouse. To constitute a permanent place of abode, the taxpayer must maintain a fixed place of abode over a sufficient period of time to create a well-settled physical connection with a given locality. It is distinguishable from “domicile” in that an individual may have several residences (or abodes), but only one domicile, at any given time.
The statutes do not define how long a “sufficient period of time to create a well-settled physical connection with a given locality” is, it could be six months, one month, a week, or even a day. Unfortunately, we can only speculate on the length. If we look back at our earlier example of Dan and his family who are domiciled in Washington and who decided to purchase the vacation home in Oregon, it is not difficult for the state to assert their right to tax them based on the following:
- 1. Does Dan spend more than 200 days in Oregon?
- Yes, given that Dan commutes in Oregon as his employer is located in Oregon. It does not matter that his days are spent working and he returns to Washington and to his family in the evening. Any days spent in Oregon count toward the 200 unless it is only for a temporary or transitory purpose.
- 2. Does Dan maintain a permanent place of abode in Oregon?
- Yes, if the statutes are strictly interpreted. By Dan owning a vacation home in Oregon, he is maintaining a permanent dwelling, and the only question is if he is spending enough time at the vacation home to create a well-settled physical connection.
It is important to note that this rule only applies to property owned by an individual for personal use. Generally, residential property, such as a house, condominium, or apartment, is not considered a permanent place of abode if the individual never uses the property as a dwelling. For example, if the taxpayer acquires residential property for investment or rental purposes, as the result of an estate settlement, or as part of a settlement in a divorce proceeding, and the property is never used by the taxpayer or the taxpayer’s family, the property is not considered a permanent place of abode for the taxpayer.
Do you have questions about your state of residency for tax purposes? Considering a change in state of residency, or contemplating a purchase of vacation property in another state? Be sure to give us all the details so we can assess the tax implications, and feel free to contact us at any time! We’d be happy to answer any of your questions.
Author: Eric Hormel, CPA, Shareholder
This blog post is a summary and is not intended as tax or legal advice. You should consult with your tax advisor to obtain specific advice with respect to your fact pattern.