Out of state rental property taxes

[Shotvun]

Hey Guys,

My client lives in California but has a rental property in Arizona.
Right now I'm working on his federal and California return. My question is does he have to file an Arizona tax return as well ? all other income was earned in California.
The gross income of the rental was around 25k.
Thanks in advance!

[FEDUKE404]

In all likelihood, yes. This is a very common scenario (>1 state involved).

CA will tax everything, but AZ will only tax the rental income using AZ/IRS ratios for many calculations. A non-resident AZ return is used.

CA should give a tax credit of some sorts for any AZ taxes on the rental property. CA will also need a copy of the AZ NR tax return provided to them.

If the rental property shows a net Sch E loss (think depreciation et al), then some things may change. But that is a different topic.

Your tax software should easily handle this situation.

[Rapid Robert]

"CA should give a tax credit of some sorts for any AZ taxes on the rental property"

I recall AZ is one of the handful of "reverse credit" states with respect to CA -- the OSTC is claimed on the non-resident AZ return, not the resident CA return.

[FEDUKE404]

"CA should give a tax credit of some sorts for any AZ taxes on the rental property"

I recall AZ is one of the handful of "reverse credit" states with respect to CA -- the OSTC is claimed on the non-resident AZ return, not the resident CA return.

ANOTHER fine reason why I'm quite happy to be >2000 miles away from the Left Coast.

I've dealt with non-resident tax returns (rental property and sale of real property) in VA, SC, and AL with home state of NC. Each of the "foreign" states requires a non-resident tax return, and the home state gives a tax credit of the lesser of the foreign state tax liability or the "extra" tax the income from the foreign state created on the home state tax liability.

[Shotvun]

In all likelihood, yes. This is a very common scenario (>1 state involved).

CA will tax everything, but AZ will only tax the rental income using AZ/IRS ratios for many calculations. A non-resident AZ return is used.

CA should give a tax credit of some sorts for any AZ taxes on the rental property. CA will also need a copy of the AZ NR tax return provided to them.

If the rental property shows a net Sch E loss (think depreciation et al), then some things may change. But that is a different topic.

Your tax software should easily handle this situation.

Thanks for all the replies! I’d also like to add that my client did take a loss due to depreciation, how does this change the situation?

[Rapid Robert]

First point, if you are not familiar, is that this would be a passive loss, which may or may not be currently deductible on the federal return and CA return (each has its own passive loss form).

As for AZ, since (assuming) there is no other taxable income, you would file a return only to track the passive loss carryforward.

Lastly, since there is no net income from the rental, then there obviously is no double-taxed income, so no OSTC to deal with.