Questions and Answers with Kendra M. Robben
State income tax ends on gains on sales of some assets
Questions and Answers with Kendra M. Robben

Published: April 9, 2008

Q: Can you briefly describe the state law that eliminates Oklahoma income tax on gains from certain asset sales?

A: Sure. Under normal circumstances, when you sell an asset you will pay both federal and Oklahoma capital gains tax on your profit from the sale. Under this new law, you will be able to avoid paying any Oklahoma tax on the gain if the asset which was sold is an Oklahoma asset and you have held the asset for at least the minimum time required by the statute.

Q: How much could this save taxpayers?

A: In Oklahoma, state income tax on the gain from the sale of property is levied at the same rate as on ordinary income. Thus, if you have more than $10,001 of Oklahoma taxable income, you will be in the 5.65 percent state income tax bracket, and any gain from the sale of property will be taxed at that rate unless the sale qualifies for this exclusion. So, if you qualify for the exclusion you could save $565 of tax for every $10,000 of gain.

Q: What types of sales are affected by the measure?

A: The exclusion applies to sales of real property or tangible personal property located within Oklahoma; the sale of a direct or indirect ownership interest in an Oklahoma corporation, LLC or partnership; and the sale of real property, tangible personal property or intangible personal property located within Oklahoma as part of the sale of all or substantially all of the assets of an Oklahoma entity.

Q: How does the exclusion work?

A: The exclusion allows taxpayers to subtract the amount of a "qualifying gain” from their Oklahoma adjusted gross income. The gain on a sale is a "qualifying gain” if it is an Oklahoma asset and the individual taxpayer has held that asset for a minimum holding period.

For real property or tangible personal property located within Oklahoma, the required holding period is five years. For an ownership interest in an Oklahoma entity, the required holding period is two years. For assets sold as part of the sale of an Oklahoma business, the required holding period is also two years.

New changes to the law. which just became effective January 1, 2008, clarify that gain attributable to intangible assets, like goodwill, sold in connection with the sale of a business and the sale of a sole proprietorship may qualify for the exclusion. Also, the new changes clarify that Oklahoma will follow the federal tax law to allow "tacking” of holding periods when property is transferred in an exchange which is not subject to tax.

Q: How would someone plan to best take advantage of this change?

A: It appears that you can utilize any of your pre-existing entities (corporations, LLCs or partnerships) to meet the required holding periods or form a new entity today to start the holding period running for future sales. For example, if you are an Oklahoma resident contemplating the future sale of a piece of real property located in Oklahoma, under the current law you can avoid Oklahoma income tax on the gains from that transaction if you hold the real property for at least five years. However, if you contribute the property to an LLC and then sell the LLC after only two years, you can qualify for the Oklahoma capital gains tax exclusion.

Q: What else should people know about this tax legislation?

A: In addition to individual taxpayers, this exclusion is available to corporations, estates and trusts, as well. The only major difference is that if the taxpayer is a corporation, estate, or trust, the required holding period for the sale of an ownership interest in an Oklahoma entity or assets in connection with the sale of an Oklahoma business is three years, instead of two in the case of an individual taxpayer.

Business Writer Don Mecoy

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