Tax Out of State Income

If I live in CA and earn income from AZ (re sale or rent income, note sale or interest income) do I pay CA or AZ state taxes? Does it make a difference if assets are owned in an entity?

Charles Perkins

Landlord · Seattle, Washington

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Nov 09 '10, 01:13 AM

If you live in California you will be required to file a California income ta return unless you can claim your exempt in any way. Doesn't sound like you would be exempt.

If you own real estate, buying selling real estate in AZ you will also have to file an AZ tax return. When it comes to the notes and interest it would be necessary to have more facts.

David D.

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Nov 09 '10, 02:23 AM

Does filing a tax return in both states mean I pay AZ state tax AND CA state tax?

Notes: 1) if I buy a $100k note and DOT against an AZ property, I live in CA, and subsequently sell the note at a profit, do I pay AZ and/or CA state income tax? 2) If I buy a note and DOT against an AZ property, again I live in CA, and collect monthly payments, do I pay AZ and CA state income tax?

Thanks for taking the time to reply?

Jon Holdman

Real Estate Investor · Wheat Ridge, Colorado

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Nov 09 '10, 02:31 AM

The simple answer to this question, as it always is with this sort of question, is to discuss it with your CPA. If you don't have one, you need to find one.

Yes, you will need to file state tax returns for both AZ and CA. Yes, you will pay taxes to both. You will not, however, pay tax on the same dollar of income in both states. You'll pay tax on the AZ income to AZ and tax on the CA income to CA.

Usually the way this works is to compute your taxes for both states as if you earned all the income in each state. Then, you compute a percentage from each state and apply that to the tax. Say you have $70K in income from CA and $30K from AZ. You compute the CA tax on $100K. Then you multiple that by 70% to get the tax you owe CA. Then you compute AZ tax on $100K. Then you multiply that by 30% to get the tax you owe AZ.

Or, something like that. Again, you CPA will know exactly how it works.

Jon Holdman, Flying Phoenix LLC

Charles Perkins

Landlord · Seattle, Washington

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Nov 09 '10, 03:46 AM

Jon, is mostly correct. You will be paying taxes to the various states based on were income is earned. The is another factor though and that has to do with residency. Since you reside in CA you must report all income earned world wide on your CA and federal income ta returns. Since you don't reside in AZ you are required to report only the income earned in AZ.

It gets a little complicated though based on the type of income and how each state defines income. In some cases you could actually have some double taxation on some of the income. For the most part though it will be split up based on where the income is sourced.

A CPA will be able to help you better with some of the tax planning aspects as long as they are familiar with the various state differences.

Jon Holdman

Real Estate Investor · Wheat Ridge, Colorado

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Nov 09 '10, 04:47 AM

A key point, as I understand it, is that if you earn income in two states, you do not get to pay taxes in each state as if the income in that state is the ONLY place you earn income. Like the feds, states have deductions. If you only earn a fraction of your total income in the state, you only get to use a fraction of that deduction. Sounds like that might be different for AZ, though.

But, seriously, you need a CPA. My experience is with MO and CO, and its likely different for each state, as Charles is pointing out.

Jon Holdman, Flying Phoenix LLC

Charles Perkins

Landlord · Seattle, Washington

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Nov 09 '10, 02:11 PM

Income allocation is a big issue. Income in many cases must be adjusted because of state and federal differences. Some income maybe taxable at the state level, but not at the federal level.

Expenses must be adjusted as well as income. States may offer other deductions and credits that will be allocated based on total income from all sources.

Tom K

Real Estate Investor · Mountain View, California

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Nov 10 '10, 04:40 PM

I also live in CA and own in AZ (and a couple other states). While I have always *filed* an AZ return, I've never had to actually *pay* taxes in AZ. This is because after taking depreciation and other deductions against my rental income, the net income is never enough to be over the threshold that would require me to pay state taxes.

I'm not a CPA but rather, do my own taxes. Since I'm not a pro, I would encourage you like the others to seek expert advice as I may be wrong in how I'm allocating across states.