Be Aware of Estate Taxes Where You Invest

Investing in real estate can set you, your heirs, and your business up for generations to come – when done correctly. The real estate industry is filled with nuances that investors need to keep track of, but one that’s often overlooked is the impact of estate and inheritance taxes where you invest.

In California, we don’t have estate taxes and haven’t since 1982 when the people voted to repeal the tax. This means investing in California real estate won’t expose you to taxes related to the transfer of your property investments through your estate. Investing outside of California, however, may expose you or your beneficiaries to state-level estate or inheritances taxes.

Which States Have Inheritance and/or Estate Taxes?

Most states have neither inheritance nor estate taxes today. Just six states have inheritance taxes (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) while 12 states (plus D.C.) charge an estate tax (Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington state). Note that Maryland is on both lists as the only state that charges both an inheritance tax and an estate tax. Iowa is phasing out its inheritance tax which will fall off completely in 2025.

It’s important to understand the difference between an estate tax and an inheritance tax. The difference between the two is simple:

  • An inheritance tax is a tax a beneficiary must pay when inheriting an asset
  • An estate tax is a tax applied to an estate after debts are paid and before assets are distributed to beneficiaries

When You Pay These Taxes Out-of-State

Even if you don’t live in the state where the taxes are levied, you or your beneficiaries are likely to face the tax implications in the transfer of the assets.

In Oregon for example, non-residents are subject to the estate tax on all assets located in the state (with a few exceptions) as long as the total taxable estate exceeds the exempt value of $1,000,000. What’s tricky about Oregon, for example, is that the state applies the estate tax (10% to 16% depending on the value of the estate) to the entire value of the estate, including the value of the assets of the estate located outside of Oregon. The tax is calculated by multiplying that number by a fraction – with the numerator being the total value of the assets actually located in the state and the denominator being the gross value of the entire estate (meaning the amount prior to determining your taxable estate value).

For example, if you hold $500,000 worth of assets in Oregon but your estate is worth a taxable value of $8,000,000 and a gross value of $9,500,000, then a 15% tax will apply (the rate applied to taxable assets worth more than $7.5M and $8.5M). The calculation will go as follows:

  • $500,000 (Oregon assets) divided by $9,500,000 (gross estate value) equals 0.053
  • 0.053 multiplied by the estate tax of 15% equals 0.0079
  • 0.0079 multiplied by $8,000,000 (taxable value of the estate) equals an Oregon estate tax of $63,200

As you can see, these calculations are complicated when you look at assets you own in other states. Many states that have inheritance or estate taxes will apply those taxes even to out-of-state residents.

Trying to navigate this all yourself could result in you missing key taxes owed in other states. The team at the Law Offices of Tyler Q. Dahl can help ensure your tax and legal strategy allows for you to maximize the value of your estate while avoiding excess tax penalties. Contact us if you’ve invested in property, real estate, or other assets outside of California.

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Dahl Law Group

At Dahl Law Group, we’re not just a law firm. We’re your trusted advisor for your business and family from beginning to end. As your family and business grow, we will be there by your side. Our passion is providing you with peace of mind and protection through personalized estate and business planning.

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