K-1 state tax filing requirements

Rental Property Investor · Ann Arbor, MI · Member since 2019 · 71 posts · 67 votes

I am a limited partner in several syndications in Kentucky, Texas and Georgia. I am a Michigan resident. I receive a K-1 for all 3 for my federal taxes. Will I need to file a Georgia and Kentucky state income tax return for the properties in Kentucky and Georgia those respective states or will my federal and Michigan return be sufficient?

Thanks in advance

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Basit SiddiqiBusiness Member

Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes

That sounds wrong - At the end of the day you are signing off the return is true and accurate.

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
6y
Originally posted by @Evan Loader:
I am a limited partner in several syndications in Kentucky, Texas and Georgia. I am a Michigan resident. I receive a K-1 for all 3 for my federal taxes. Will I need to file a Georgia and Kentucky state income tax return for the properties in Kentucky and Georgia those respective states or will my federal and Michigan return be sufficient?
Thanks in advance

If no composite return is filed on your behalf, depending on state, technically you are required to file in those states.
If there is a loss and you want to preserve those losses to offset income when you exit out the deal, probably file.
If losses/gain/income are small, from practical purpose, maybe not file. Pay penalties and interest if state comes back.

Talk to your tax advisor. He will know what to do.

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Lance LvovskyPro Member
Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
6y
Were composite elections filed.
If not, likely you need to file nonresident income tax returns in those other states. Speak to your CPA. You may also be eligible for state tax credits based on state, filing type, etc.
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Eamonn McElroy
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
6y
The advice of the prior two posters: "speak to your CPA" is spot on.
If you are investing in syndications that have activity in states outside your own, your tax situation is sufficiently complicated to onboard a professional.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
6y
@Evan Loader

Texas does not have a separate individual income tax filing.

Kentucky and Georgia may have a tax filing requirement based on a minimum net income/gross income threshold.
Even if you are not required to file, you may want to consider filing - to roll over potential NOL's.

Furthermore, a filing doesn't necessarily mean you have to pay a tax - i depends on what the income from the K-1 reports.
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Evan Loader
OP
Rental Property Investor · Ann Arbor, MI · Member since 2019 · 71 posts · 67 votes
6y
@Basit Siddiqi
I have a CPA and have used one from 2019 forward because I work overseas as a civilian defense contractor, so I need the assistance of a CPA to handle the FEIE as well as the K-1.
I informed him of this and he told me we don’t have to file in GA and KY if there is no income. According to him I do not need to file state returns for those states to preserve my loss carryovers until there is actual profit showing. He says he can keep track of the losses to carry forward from a K-1 until they start showing profit. I won’t use those losses to offset any other income except those K-1 losses.
If he is wrong and I need to file to preserve those losses when I carry them forward do you have any documentation to substantiate that? I don’t want to challenge him unless I know 100% for sure I have to.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
6y
@Evan Loader

The way most syndications work is that there is a 5 to 10 year exit plan(normally 7 years).

Those 6 years will normally operate and show losses. The gain/income comes in the year of exit normally, it can come sooner of course.

States will not acknowledge losses unless you file a tax return and carryforward the NOL.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
@Evan Loader
Both GA and KY allow composite tax returns, so first check if your partnership already filed those. Then you don't need to do anything else.
If no composite tax returns were filed, I agree with your CPA's approach. Even if filing returns to preserve losses is required (and it may or may not be the case), it's usually not worth the effort since the numbers on K-1 are typically small. If your state losses are several hundred dollars or more - then pressure your CPA to verify whether these losses are worth filing current state tax returns.
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Evan Loader
OP
Rental Property Investor · Ann Arbor, MI · Member since 2019 · 71 posts · 67 votes
6y
@ Basit Siddiqi @Michael Plaks

Thank you both, I will reach out to both sponsors and ask whether they have filed composite returns. If they have not, I still would appreciate some documentation that show a requirement to file a state tax return each year to carry forward a loss when I'll use it to offset some gains. I am sure my CPA will continue to fight me if I don't have any documentation to prove this.
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Evan Loader
OP
Rental Property Investor · Ann Arbor, MI · Member since 2019 · 71 posts · 67 votes
6y
@Brandon Hall could you shed light on this issue filing a state tax return to preserve a loss for a K-1?
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Tushar P.
Member since 2019 · 332 posts · 171 votes
6y
@Evan Loader I’m looking at my federal tax returns for the last few years (filed by PwC) and I see no state return filed for the K-1s. But my K-1 1065 forms were from MLPs rather than real estate syndications - not sure if that makes any difference.

For 2019, I do have several K-1 1065 forms from real estate syndications. Total losses amount to ~$12k: captured from net of box 1 (ordinary loss), box 2 (net rental loss), and box 4c (total payments). This loss is designated as non-passive loss in Schedule E and hence deductible from ordinary income (W2, 1099B stock sale, etc).

I see no state returns simply because of no income as well as the losses being non-passive and hence deductible from ordinary income.

How is your CPA suggesting to track the passive losses without filing for state return? Via form 8582? I do see form 8582 in some of the federal tax returns from previous years.

By the way, have you already filed your return? If yes, what did you end up doing?

@Basit Siddiqi I guess the losses in K-1 can be non-passive and hence deductible from W-2 income, resulting in no need to file state return? Even for passive losses, they can be captured in form 8582?

@Ashish Acharya even if the sponsor filed for composite returns, I guess the LP will still need to pay taxes on the federal return, isn’t it (on the amount in box 4c)? In any case, why prefer penalties over filing? Especially if the CPA/firm is working on a (high) flat fixed rate.

@Michael Plaks why file for state return if the passive losses can be captured in form 8582?
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
6y
@Tushar P.

Form 8582 is a federal form and has no bearing on state returns.
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Tushar P.
Member since 2019 · 332 posts · 171 votes
6y
@Basit Siddiqi in that case I wonder how the OP’s CPA is going to track the passive losses in K-1. Personal excel sheet?
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Tushar P.
Member since 2019 · 332 posts · 171 votes
6y
Hi folks @Basit Siddiqi @Michael Plaks @Lance Lvovsky - I am trying to understand what’s the motivation for the CPA for not wanting to file the state return? Is it because the cost of their service is fixed and therefore they try to do as little as possible, or is it something else?
Just for the sake of professionalism, I’m hoping it is the latter. I see that form 8582 can be used to record suspended passive losses for federal return - this is easy to do and also worth doing, as the federal tax due can be lowered by 15-20% of the losses. $10k in losses will reduce the federal tax due by $1.5-2k.
However, the state tax due gets lowered by a very small amount by using passive losses to offset passive income as I assume state tax rate is quite low (I live in TX, so never worried about state tax) compared to long-term capital gains rate of 15-20%. Assuming 3-5% state tax rate, if the losses are less than $10k then perhaps the hassle associated with filing the state return is not worth the effort. But that conclusion is more about what is convenient for the CPA rather than the client they are serving...
Unless the losses can be tracked without filing the state return and then captured as suspended losses when there is passive income from the syndication (this is what the OP’s CPA is proposing to do) - how is this possible?
Also, why would State not accept any “contemporaneous record” maintained by the taxpayer (or taxpayer’s CPA)?
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
Originally posted by @Tushar P.:
I am trying to understand what’s the motivation for the CPA for not wanting to file the state return? Is it because the cost of their service is fixed and therefore they try to do as little as possible, or is it something else?

I cannot speculate about other people's reasonings. On some days, I struggle to understand my own. :)
Generally, not unlike contractors, we do what we are hired/paid to do. If you need an extra room painted or an extra tax return prepared, you have to pay more. If I ask my client to pay me $XX to prepare a state tax return which saves him $0 on taxes, only to have his losses documented, it's normally a hard pass. Especially since these losses may never become useful; it's debatable whether documenting prior losses with such returns is required; rules differ from state to state etc.
Just like the rest of you, I want clarity, but I do not have it. I came across multiple colleagues of mine lamenting the lack of clarity on this common issue. If someone has a reliable resource (not some freelance reporter's "research") which conclusively and clearly summarizes these rules state-by-state - not only I will appreciate it, I will gladly pay for such resource.
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Tushar P.
Member since 2019 · 332 posts · 171 votes
6y
@Michael Plaks thanks for explaining - seems like there is lack of clarity even among folks who handle tax preparation as professionals 😏
One thing that struck me when I looked at my return is that my losses have been categorized as non-passive. I find that surprising and wondering how that is possible.
As someone with a full-time W2 job who is a limited partner in a real estate syndication with less than 1% share and does not satisfy any material particiapation criteria, I would have expected the loss to be passive. And in the absence of any passive income, these passive losses will have to be suspended and carried over. But the loss from Schedule K-1 has been categorized as non-passive and deducted from the W-2 income. I hope the CPA knows what they are doing 😅
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Taylor L.
Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
6y
Originally posted by @Tushar P.:
@Michael Plaks thanks for explaining - seems like there is lack of clarity even among folks who handle tax preparation as professionals 😏
One thing that struck me when I looked at my return is that my losses have been categorized as non-passive. I find that surprising and wondering how that is possible.
As someone with a full-time W2 job who is a limited partner in a real estate syndication with less than 1% share and does not satisfy any material particiapation criteria, I would have expected the loss to be passive. And in the absence of any passive income, these passive losses will have to be suspended and carried over. But the loss from Schedule K-1 has been categorized as non-passive and deducted from the W-2 income. I hope the CPA knows what they are doing 😅

Did you discuss that with the syndicator? It's possible their accountant made a mistake.

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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
6y

That sounds wrong - At the end of the day you are signing off the return is true and accurate.

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Tushar P.
Member since 2019 · 332 posts · 171 votes
6y
@Basit Siddiqi yes I’m a little concerned, so I checked with the CPA and the response is “the loss is non-passive because that is how it is reported in the K-1”. 🙄

I have not really looked into my return for last ~6 years: every year I just dump the documents and then get a letter with the amount I need to pay to the IRS. But now that I’m trying to diversity my investments into real estate, I am looking into my tax returns and figuring out a few things myself. I’m not an accountant or a real estate professional, but what I gather is that even if I was a real estate professional, I would not be able to deduct ~$12k loss from my income if the income exceeds $150k.

@Taylor L. good point, I need to check with the GP.
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Taylor L.
Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
6y
Originally posted by @Tushar P.:
@Basit Siddiqi yes I’m a little concerned, so I checked with the CPA and the response is “the loss is non-passive because that is how it is reported in the K-1”. 🙄

I have not really looked into my return for last ~6 years: every year I just dump the documents and then get a letter with the amount I need to pay to the IRS. But now that I’m trying to diversity my investments into real estate, I am looking into my tax returns and figuring out a few things myself. I’m not an accountant or a real estate professional, but what I gather is that even if I was a real estate professional, I would not be able to deduct ~$12k loss from my income if the income exceeds $150k.

@Taylor L. good point, I need to check with the GP.

Please do! Everyone makes mistakes, including accountants. You should always be able to ask any question you like to the General Partner
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Eamonn McElroy
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
6y
Please interview new CPAs before January.
You likely need amended tax returns, and will owe tax, penalties, and interest, which are continuing to accrue.
Your CPA's response indicates a lack of understanding, if any at all, about how the passive activity loss rules work.

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
Originally posted by @Taylor L.:

No, we do NOT!!! :)
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
Originally posted by @Tushar P.:

I agree with you and with my colleagues @Basit Siddiqi and @Eamonn McElroy: your tax return is most likely incorrect. If it has not been signed and filed - do NOT sign it until reviewed by a competent real estate accountant. Thumbs up for having good understanding of taxation to get suspicious.
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Tushar P.
Member since 2019 · 332 posts · 171 votes
6y
@Michael Plaks I’m based in Houston and I had contacted you for help back in June but I understand you are overbooked 🤗
Good thing is that I haven’t signed yet, though the deadline is Oct 15 😅

@Eamonn McElroy thanks for the note. I’m beginning to think it’s the CPA rather than the GP
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
Originally posted by @Tushar P.:
@Michael Plaks I’m based in Houston and I had contacted you for help back in June but I understand you are overbooked 🤗
Good thing is that I haven’t signed yet, though the deadline is Oct 15 😅

Thank you for contacting my firm, which you did at the end of July. By that time we indeed stopped taking new clients for 2019 tax service. Many of my colleagues are in the same situation by mid-year, and some are fully booked even earlier. You are highly unlikely to find someone who is an REI expert and willing to take you as a new client between now and Oct 15, unfortunately.
If you're expecting a refund after your tax return is corrected, then I recommend that you let the Oct 15 deadline pass without filing this return and engage someone after the deadline to review your taxes. Amending tax returns increases your IRS audit risk and should be avoided if there're alternatives.
If you expect to owe the IRS, you will be risking IRS penalties if you miss the deadline. Personally, I would still miss the deadline and then fight the penalties based on your situation, but it's not my choice to make.
One more thing: due to the Tropical Storm Beta, it is quite probable that we will be declared a Federal disaster area, and the IRS might extend the deadline for us. Unknown at this time.
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Tushar P.
Member since 2019 · 332 posts · 171 votes
6y
@Michael Plaks yes, it was July end and not June (thanks for correcting that) but I guess you are in high demand to stop accepting by June anyways.
I did pay a bigger amount when I extended the filing date, so I don’t think I owe money to the IRS. I should get $2-3k back. Does that mean filing after Oct 15 will not incur penalties?
I can still try to explain the PAL rules set by the IRS to the current CPA and request to change the tax return before filing...
From your note, I’m guessing a lot of damage was caused by Tropical Storm Beta. Not sure what happened outside during the week - our offices are closed indefinitely so I’m working from home. Just stayed inside and watched/heard the persistent rain for days. I haven’t gone outside the house for 10 days now (though MS Teams video calls provides some respite) but have plans to meet up with a friend for lunch tomorrow 🙂👍
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K-1 state tax filing requirements

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