K-1 state tax filing requirements
Rental Property Investor Ā· Ann Arbor, MI Ā· Member since 2019 Ā· 71 posts Ā· 67 votes
K-1 state tax filing requirements
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Basit SiddiqiBusiness Member
Accountant Ā· New York, NY Ā· Member since 2015 Ā· 8k+ posts Ā· 3k+ votesThat sounds wrong - At the end of the day you are signing off the return is true and accurate.
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42 Replies
- 6yMichael PlaksPro MemberTax Accountant / Enrolled Agent Ā· Houston, TX Ā· Member since 2014 Ā· 5k+ posts Ā· 6k+ votes
Correct: no late penalties if you made an adequate payment with your extension. Technically, missing the IRS deadline puts you in non-compliance with the tax law. In some situations (immigration, attorney or CPA license etc) this could be a problem in itself. But there will not be a monetary penalty for filing late in this case.
PS. Outside is nice. Try it. ;)
Thanks @Michael Plaks
If there can be immigration issues then I need to resolve this and file before Oct 15 š
Here is my action plan:
1) contact the GP CPA and confirm that the loss is passive for LP
2) share the response with my CPA, include excerpts from IRS pub 925, IRS PAL ATG, other online resources which confirm that the loss is passive
3) If 2 fails then propose 3-way call including GP CPA
4) if 3 fails then furnish a letter from a tax attorney to confirm that the loss is passive5) if 4 fails then try turbo tax or hrb and suspend the loss using form 8582
6) if 5 fails then let the oct 15 deadline pass and then file before dec 31
Already contacted the GP CPA. Also posted the issue on the e-forum of my legal plan for a tax attorney to pick it up and offer help. Also contacted some lawyers (from my legal plan) who deal with real estate. I know 5 will not work as they donāt have the feature to defer capital gains that are invested in opportunity zone, so I will have to somehow manually record that in 8949 and transfer to Schedule D.
After this is over, I will apply for a CPA license - I am now wondering if it is as easy as getting a license for property manger or real estate agent š
- 6yMichael PlaksPro MemberTax Accountant / Enrolled Agent Ā· Houston, TX Ā· Member since 2014 Ā· 5k+ posts Ā· 6k+ votes
Originally posted by @Tushar P.:
Thanks @Michael Plaks
If there can be immigration issues then I need to resolve this and file before Oct 15 š
There could be, albeit not likely. Still, I'm a naturalized citizen myself, and I would be extra careful with anything related to immigration.
If your plan faces hurdles, you can allow your CPA to file your tax return as is with an intention to amend later thru another accountant. Just instruct your CPA to apply your entire refund towards 2020 instead of pulling it out. This way you will avoid late payment penalties on the amended return.
One more thing: if your CPA made this mistake, he may have made other mistakes, as well.
Yes, very likely there can be more mistakes. I would have expected someone with 15 year experience plus their own accounting firm to know these things that I learned in just last few days (with your help, of course, and also thanks to @Basit Siddiqi @Eamonn McElroy @Taylor L.)
But itās possible that their specialization is something else (like corporate taxation) rather than real estate. Though I would have thought PAL rules would be a basic thing to know for CPAs irrespective of specialization.
For the state tax question ā if you do not file a state return in years with losses, the state will not have record of your suspended losses. When you sell the property and try to claim those past suspended losses against your gain, it will not match the numbers on file with the stateās computer system. Skynet will automatically disallow your claimed losses and send you a tax notice.
@Kevin C. skynet? I thought skynet was into bigger things than disallowing tax savings š
Is the state tax on depreciation recapture also 25% or is it same as the state tax rate?
For example, CO has a state tax rate of 4.63%. Assuming LP has invested in a real estate syndication in CO and the asset sale price a few years later is much higher than the unadjusted cost basis, how much CO state tax will the LP pay on depreciation recapture: 25% or 4.63%?
Thatās the point mentioned by @Michael Plaks - whether it is worth filing the state tax return or not. Especially if losses in K-1 are not big or if the tax rate on depreciation recapture is very low (4.63% in the example above).
I am assuming form 8582 will take care of the depreciation recapture tax at the federal level, so no issues there. But the other question is why wouldnāt form 8582 or ācontemporaneous recordā qualify as a record of passive loss at state level? Just because skynet wouldnāt allow it?
@Tushar P. Pretty much every state taxes all income at the same rate. Generally no difference in the state tax rate for depreciation recapture.
The information on the federal form would never flow into the state tax system. Odds are you would receive an automatically generated Notice and need to respond and explain you didnāt file past returns and ask for mercy. If you had small losses (no past due tax payments) and the late return penalties are lower than the tax prep fees you saved by not filing - you come out ahead, but itās a win with an *. If you need to pay your CPA to help respond to tax notices or audits, you wonāt save money in the end.
Always best to file personal nonresident state returns when youāre required to under the stateās laws. Owning a direct or indirect interest in real estate within the state is generally an automatic filing requirement. Itās not fun to pay a tax preparer for a blank state return but it could save you big down the road (in penalties and headaches). Ask the GP to file a composite return on your behalf in states where itās possible.
@Kevin C. that makes sense. I see some states have free e-file via their websites: for example just checked for CO and they have it. For such states, perhaps the LP could file non-resident state returns themselves if the CPA is pushing back saying no need to file state returns since there is no income but only loss.
Also wonder if the GP can selectively file composite returns for some LPs who want it. For example, for one of the GA investments I did receive a K-1 but with a note that composite returns have been filed. So no need to file GA state return for that one, even though it showed income instead of loss. But the GP apologized for filing composite returns as it resulted in some LPs not being able to utilize their GA losses. And then the GP mentioned that next year they will not file composite returns. So it looks like some LPs may prefer composite return but other LPs may not. And Iām not sure if the GP can selectively file composite returns for the LPs who prefer it.
@Tushar P. Most states allow each LP to elect to be included in the composite filing (or not included). Every state does it differently.
If you have multiple GA investments - you would consider not being included in composite so you can net your GA income together across investments (when possible) on your personal GA nonresident return.
If you have one GA investment and never want to invest there again or file a GA tax return, you would elect to be included in the composite for GA.
I didnāt look at GAās rules - this is a general example. Every state is different.
Update on previous post.
Filed the federal return by treating the loss in Schedule K-1 as passive. However, state tax return was not filed because āthe info in 1040 flows into the state tax return, hence the loss will be captured when filing the state tax return in the futureā. Having never filed any state tax return before, I guess state tax return forms donāt exist in isolation but are filed together with the federal return, with various info in the federal return passing into the state return?
Anyways, am done with this years filing.
@Evan Loader can you provide update on what you did? Filed the state return or not? And what was the reason.
- Accountant Ā· Atlanta, GA Ā· Member since 2015 Ā· 1k+ posts Ā· 1k+ votes6y
Every state is going to be different, as each state has a slightly different tax regime in place.
Some states recognize IRC Sec 469. Others have decoupled and do not. For the latter, suspended PAL at the federal level creates federal-state timing differences.
Your CPA is in the best position to advise you on the matter, as well as educate you. There is no "one size fits all" answer here. It depends on the state.
For example, GA starts with federal AGI and then makes adjustments based on GA tax law. If a PAL is suspended for federal, it is also, generally, suspended for GA.
@Eamonn McElroy I see, so there is no general rule. For me, it was for CO. And looking at the CO state tax form, it does start with federal and then goes into state level.
I also have K-1s from GA (heavily invested in Atlanta) but the sponsor filed a composite return for one of them, and other K-1s are for either opportunity zones or blank K-1s only showing the amount invested.
Also have K-1s from Illinois (heavily invested in Chicago) but all the K-1s in the first year are blank, only showing the amount invested. Hence no need for state filing there.
Looking at the state tax rates, I donāt think I will now invest in CA, OR, ID, MN, WI, IA, NY, NJ, ME, DC. Among these, I did look into investing in CA, DC, NY, WI.
Thankfully all the investments in CA and DC are opportunity zones. But that makes me wonder if no tax on earnings (for 10-yr investment) is applicable only at federal level.
Anyways, thanks for clarifying the state return requirements.
- Accountant Ā· Atlanta, GA Ā· Member since 2015 Ā· 1k+ posts Ā· 1k+ votes6y
But that makes me wonder if no tax on earnings (for 10-yr investment) is applicable only at federal level.
Again... Each state decides which IRC provisions to conform to and which to not. There is not a general definite answer to this question. You need to examine the state in question's revenue code.
These are all good questions for discussion with your tax advisor.
guys - I've been investing in ATM's as a LP and turns out the ATM"s are in 10 states so I'll have to technically file in 10 states. However, as you know with the ATM business, the sponsor is simply depreciating aggressively and there won't be any depreciation recapture since there's no value in the ATM at the end of its life. Hence, do I need to really file non-resident returns in all the various states? Thanks
- Rental Property Investor Ā· Ann Arbor, MI Ā· Member since 2019 Ā· 71 posts Ā· 67 votes5y
Originally posted by @Tushar P.:
Update on previous post.
Filed the federal return by treating the loss in Schedule K-1 as passive. However, state tax return was not filed because āthe info in 1040 flows into the state tax return, hence the loss will be captured when filing the state tax return in the futureā. Having never filed any state tax return before, I guess state tax return forms donāt exist in isolation but are filed together with the federal return, with various info in the federal return passing into the state return?
Anyways, am done with this years filing.
@Evan Loader can you provide update on what you did? Filed the state return or not? And what was the reason.
The current CPA is tracking it via a spreadsheet and also filed form 8582 for federal for 2019 and will do so for 2020, he did not file state forms. Since this particular CPA specializes in overseas expats as opposed to real estate investors, I will probably move to a new CPA that specializes specifically in real estate for the 2021 tax year. For 2019 and 2020 I am not too concerned as all of my K-1s still show a paper loss, but 2021 will probably start showing some gains and potentially an exit. If state returns need to be filed to ensure those suspended losses get carried forward for tax purposes for 2019 or 2020, my new real estate CPA can handle filing those returns. '
As far as composite returns filed by the syndication GPs, I have followed up with and not yet heard back. I'm looking forward to working with a CPA that specializes in real estate syndication LPs, and am interviewing one in Texas tomorrow off the recommendation of a colleague.
- Member since 2022 Ā· 1 post Ā· 0 votes2y
Hello - Just picking up this thread to see what you ended up doing to get the loss carried forward nd whether you ended up filing a non-resident state tax in the state where your investment is. I am in same situation and would appreciate any tips that you can provide. Thank you in advance
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