OAR 150-118-0115: Natural Resource Property Exemption

(1) Definitions. The following definitions apply for purposes of ORS 118.145: (a) “Domestic partner” means an individual who has entered into a domestic partnership as defined in ORS 106.310. Per the general applicability provision of ORS 106.340, “spouse” as used in these rules includes domestic partner. (b) “Eligible business entity” means a business entity that is owned 100 percent by qualifying family members or eligible entities, including, but not limited to corporations, partnerships, limited liability companies, and sole proprietorships. (c) “Eligible entity” means an eligible business entity or an eligible trust. (d) “Eligible trust” means a trust or subtrust whose permissible distributees are all qualifying family members or eligible entities. (e) “Material participation“ means active management as defined by IRC 2032A(e)(12) and associated Treasury Regulations as of December 31, 2010. (f) “Qualifying family member” means a person within the third degree of relation to the decedent, by blood, marriage, adoption, civil union, or domestic partnership, and includes: (A) A great-grandparent, grandparent, or parent of the decedent; (B) The spouse of the decedent; (C) A great-grandchild, grandchild, or child of the decedent; (D) An aunt or uncle of the decedent; (E) A sibling, niece or nephew of the decedent; and (F) The spouse of any family member described in paragraphs (A) or (C) to (E). (g) “Relevant business days” means those days during which a person that is engaged in active management of natural resource property would customarily be expected to exercise significant management activities, given the nature of the industry in which the business is operating. (h) “Small forestland owner” means a decedent who owns, throughout the five years immediately prior to the date of the decedent’s death, forestland that is at least 10 acres but fewer than 5,000 acres. “Small forestland owner” also includes a decedent who holds an interest in an eligible entity that owns forestland that is at least 10 acres but fewer than 5,000 acres. (2) Estates of decedents who die on or after July 1, 2023, may claim the exemption under ORS 118.145 only for natural resource property located in Oregon. (3) An exemption under ORS 118.145 may be claimed for natural resource property held by an eligible entity. The eligible entity must qualify as an eligible business entity or eligible trust. The eligible entity may hold the natural resource property directly or indirectly through another eligible entity. The value of an eligible entity is included in the exemption only to the extent the value of the eligible entity is attributable to natural resource property used in a farm, fishing or forestry business owned by the entity. Example 1: The decedent was the sole lifetime beneficiary of a trust that is included in the decedent’s estate. The trust held two assets at the time of the decedent’s death: a large portfolio of marketable securities, and a 100 percent membership interest in FFF, LLC, a limited liability company. FFF, LLC’s sole assets are natural resource property that is used in a farming, forestry, or fishing business. Assuming that all other requirements of ORS 118.145 and this rule are met, the decedent’s estate can exclude up to $15 million of the value of that portion of the trust interest that is attributable to FFF, LLC. (4) Transfer of ownership of natural resource property, which includes an interest in an eligible entity for purposes of this paragraph, between qualifying family members and eligible entities does not cause natural resource property to lose its eligibility for exemption under ORS 118.145 if all other requirements of ORS 118.145 and this rule continue to be met. If an interest in natural resource property is transferred by a qualified family member or an eligible entity to a qualified family member or an eligible entity, the interest in natural resource property shall be deemed to have been owned by the transferee during the time that the interest in natural resource property was owned or deemed to have been owned by the transferor. (5) Material participation. (a) To qualify under ORS 118.145, the decedent or a qualifying family member of the decedent must materially participate in the management of the business associated with the natural resource property. The duties of material participation may not be delegated to a person who is not a qualifying family member, except when the qualifying family member is an eligible qualified heir as defined by IRC 2032A(c)(7)(C), as in effect on December 31, 2010, in which case the material participation duties may be delegated to a fiduciary of the eligible qualified heir. (b) The decedent or qualifying family member(s) must materially participate by engaging in active management of the farming, forestry, or fishing business for at least 75 percent of the relevant business days during the calendar year, or for qualifying small forestland owners, for the entire year as defined in 5(c) of this rule. Example 2: For 50 years, Stubb ran a fishing business, with a homeport at Newport, devoted solely to halibut fishing off the Oregon Coast. This fishing business required active management decisions to be made only during six months of the year. Stubb made all decisions described in IRC 2032A(e)(12). Ahab, Stubb’s nephew, took over the fishing business after Stubb’s death in January 2025 and made all active management decisions in the relevant six months of the year during each of the five calendar years immediately following the year of Stubb’s death. Both Stubb and Ahab materially participated as required by ORS 118.145 and this rule because each made all the active management decisions during the six months of each calendar year that management decisions were required for the fishing business. Example 3: Fred is a wheat farmer in Eastern Oregon. Fred’s business requires active management decisions to be made throughout the calendar year. Fred makes active management decisions an average of five out of every 10 days because the conduct of Fred’s wheat farming business requires active management decisions to be made only on those days. Fred meets the requirement to materially participate at least 75 percent of the time because Fred makes all active management decisions that need to be made over at least 75 percent of the relevant business days of the calendar year. (c) A small forestland owner is not subject to the requirement to materially participate for at least 75 percent of the relevant business days during the calendar year. A small forestland owner must actively manage the small forestland property through appropriate or customary silvicultural or management activities given the current phase in the forest management cycle for the small forestland property. A small forestland owner must maintain documentation of these silvicultural or management activities. This paragraph applies to estates of a decedent who dies on or after January 1, 2026. Example 4: Kingston, the decedent, owned a tree farm. He contracted with Lily, a professional forester, to manage the property for him as Kingston, a doctor, lived and worked in a town 50 miles away. The activities of Lily are not considered in determining whether Kingston materially participated in the tree farm operation. During the 5 years preceding Kingston's death, there was no need for frequent inspections of the property or consultation concerning it, given that most of the land had been reforested and the trees were in the beginning stages of their growing cycle. However, Lily annually submitted for Kingston's approval a proposed plan for the management of the property over the next year. Kingston actively participated in making important management decisions, such as where and whether a pre-commercial thinning should be conducted, whether the timber was adequately protected from fire and disease, whether fire lines needed to be plowed around the new trees, and whether boundary lines were properly maintained around the property. Kingston inspected the property at least twice every year and assumed financial responsibility for the expenses of the tree farm. Kingston also reported his income from the tree farm as earned income for purposes of the tax on self-employment income. Over a period of several years, Kingston had harvested and marketed timber from certain tracts of the tree farm and had supervised replanting of the areas where trees were removed. Kingston's history of harvesting, marketing, and replanting of trees showed him to be in the business of tree farming rather than merely passively investing in timber land. In light of all these facts, Kingston is deemed to have materially participated in the farm as his personal involvement amounted to more than managing an investment in natural resource property. If the history of Kingston’s tree farm did not show such an active business operation, however, the tree farm would not qualify for the natural resource property exemption. (d) Material participation by a decedent and each qualifying family member is evaluated separately for each family member and may not be combined for purposes of determining the percentage under subsection (b) of this section. However, more than one family member may materially participate at any given time. (e) Disqualification for failure to meet material participation requirements in a calendar year shall not occur if the failure to meet material participation requirements in the calendar year is due to the death or disability, as defined in IRC 2032A(b)(4)(B), of a qualifying family member. Example 5: Mary and Elizabeth inherit a large cattle ranch from their father Henry. The cattle ranch requires year-round decision-making. Mary makes all the management decisions for the ranch business for the first six months of the year and Elizabeth makes all the management decisions for the remaining six months of the year. Material participation requirements are not met because neither Mary nor Elizbeth make management decisions for at least 75 percent of the relevant business days of the calendar year. Example 6: Mary and Elizabeth generally share the decision making for the cattle ranch business during the entire calendar year, so they each independently meet the requirements for material participation. One year, Mary decides to go on vacation for six months of the year. The material participation requirements are still met because Elizabeth is making management decisions for at least 75 percent of the year. (f) Active management decisions that demonstrate material participation include, but are not limited to, the following: inspecting growing crops, animals, on-going fishing operations, forests, or equipment; reviewing and approving annual crop plans in advance of planting; making a substantial number of the management decisions of the business operation; approving expenditures for other than nominal operating expenses in advance of the time the amounts are expended; deciding what crops to plant or how many cattle to raise; determining what fields to leave fallow; determining what kind of fish to harvest and the equipment needed to harvest the fish; determining where and when to market crops and other business products; determining how to finance business operations; and determining what capital expenditures the trade or business should make. (g) A disposition of the natural resource property occurs if the material participation requirements are not met. Whether the material participation requirement has been met for a calendar year will be determined at the end of the calendar year. If the material participation requirement is not met during the calendar year, the disposition of the natural resource property is deemed to occur December 31 of the calendar year in which the disposition occurs. (h) The decedent or qualifying family member must maintain documentary evidence of all decisions described by IRC 2032A(e)(12) related to the conduct of the natural resource business. The documentary evidence should record the involvement of the decedent or qualifying family member. Examples of documentary evidence of decision-making include, but are not limited to, the following: a contemporaneous log, contemporaneous business communication, contracts, legal documents, contemporaneous minutes, and statements related to the natural resource business made under oath in a court of law. Documentary evidence of material participation may be evaluated with reference to industry standards to determine if the material participation requirement has been met. (6)(a) Natural resource property previously used as a basis to claim the exemption under ORS 118.145 may be replaced with other natural resource property and not result in a disposition subject to additional tax, subject to following other applicable statutory requirements and the following: (A) If the relinquished property is real property, the replacement property must be real property acquired within one year of the transfer of the relinquished property, or within two years of the transfer in the case of property that is involuntarily converted within the meaning of section 1033 of the Internal Revenue Code; (B) Personal property is considered replaced by other natural resource property by holding and using the proceeds from the sale of personal property in an operating allowance as described in ORS 118.140(1)(j) and subject to the limitation at ORS 118.140(2)(a), or by acquiring other natural resource property within 180 days of the transfer of the relinquished property (C) the replacement property must qualify as natural resource property and must be used in the farming, forestry or fishing business promptly after its acquisition. (b) If the purchase price of the replacement property is less than the gross sales price of the relinquished property less selling expenses (net sales proceeds), the amount that is treated as a disposition subject to additional tax is the gross sales price multiplied by a fraction that is equal to the difference between the net sales proceeds and the purchase price of the replacement property, divided by the net sales proceeds. Gross sales include any amount of money and fair market value of property received, as defined by IRC 1011(b) and associated regulations in effect on January 1, 2026, from the sale of or other disposition of property. (c) To the extent that the replacement is not treated as a disposition subject to additional tax, the replacement property shall be deemed to have been owned by the transferor during the time that the transferred property was held or deemed to have been owned by the transferor, regardless of whether the transfer occurs before or after the death of the decedent. (7) The value of the exemption allowed under ORS 118.145 must be excluded from the numerator and denominator of the ORS 118.010(5) and (6) apportionment calculations. (8)(a) A person who inherits an interest in natural resource property from the decedent or is a recipient of a transfer of an interest in natural resource property from a qualifying family member must attest, on a form prescribed by the department, that the person acknowledges and understands the requirements prescribed by ORS 118.145 and this rule to claim the natural resource property exemption. (b) The owner of the natural resource property at the time of the disposition or disqualifying event must pay any additional tax owing if the requirements for exemption under ORS 118.145 and this rule are no longer met. (c) A qualifying family member must file a report each year on a form prescribed by the department reporting whether the exemption requirements under ORS 118.145 and this rule continue to be met during the relevant five-year period. (9) The amendments to this rule effective on January 1, 2026, except as stated in paragraph 5(c), apply to estates of decedents dying on or after July 1, 2025. [Publications: C ontact the Oregon Department of Revenue for information about how to obtain a copy of the publication referred to or incorporated by reference in this rule pursuant to ORS 183.360(2) and ORS 183.355(1)(b).]