Multi-State Tax

Today TaxMama hears from Len overlooking the beach in California, who asks, “I am not a tax professional, but: Are you SURE the answer you gave the slightly lost Missouri lady with the partial interest in the California building is correct?

She is, after all, not even a part-time California resident. Your answer implies that anyone who owns income property or a partnership interest in some other state must file a tax return for that state, as if it were a foreign country. (Her yearly CA income sounds like it was probably near or below the CA standard deduction anyway.) It also implies that anyone who sells an out-of-state property is likewise liable.

Neither of those propositions either matches my experiences or sounds reasonable.”

Hey Len, since when are taxes reasonable?

The Great State of California taxes all income generated in California, or earned by California residents. Period.

In fact, California even went so far as to chase retirees to Florida and elsewhere to tax them on the pensions they received in those states, if they earned the pensions while working in California. Congress finally had to write a law to specifically prohibit that.

In this case, though, the real estate rents are earned IN California. So it’s not even a gray area. California,
if they can reach an investor’s money, will grab it. And California definitely CAN reach an investor’s money when the property is sold via escrow. The escrow company is required by California law to withhold California taxes unless the distributee fills out Form 593 to indicate that either there are no profits from the sale, or the profits aren’t taxable because it’s a sale of a personal residence. http://www.ftb.ca.gov/individuals/wsc/California_Real_Estate.html

California even withholds from residents living in California, not just out-of-staters.

Most states tax the rental income generated from properties in their state. I can’t think of a state (that has an income tax) that doesn’t. We prepare those extra, non-resident returns for our clients all the time.

And, when a California resident owns property out of state, you must pay tax on the income in California. Though, usually, you’ll get a credit for taxes paid to most other states. (Not all. California must have a specific reciprocity agreement with a state for this to take place. And CA does not have agreements with all states.)

On the other hand, most real estate rentals are designed to generate tax losses via depreciation. So, if you have a loss, even from another state, and it’s deductible on your Federal return, odds are that it will be deductible on your CA FTB return, too.

And remember, you’ll find answers to questions about taxes across state lines and all kinds of tax issues, free. Where? Where else? At TaxMama.com

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