If you are a passive investor in a deal that owns property in another state, and that state taxes income, you likely owe tax there too, even if you've never set foot in it. Most LPs don't find out until the bill shows up.

The income is taxed where the property sits, not where you live. Your home state taxes it too, since it taxes everything you earn. It fixes the double-tax with a credit for what you paid the other state, but only up to your own home rate. So:

- Property state's rate is lower than home? You just pay your home rate.

- Property state is higher? The credit runs out and you eat the difference.

- Live in a no-tax state like Texas or Florida? Nothing at home to credit against, so the other state's tax is all extra. "I pay no state tax" stops being true the day you invest out of state.

The sting is the sale. During the hold it's small because depreciation keeps income low. At exit the gain is taxed by the property state, includes all that depreciation coming back, and some states hold money out of your proceeds at closing. Quiet for years, then a real number in one.

Often the operator handles the filing, or lets you opt into a group return. Easy, but it taxes you at the state's top rate with no deductions, so you can overpay versus filing yourself.

I'm a CPA and former Big Four CRE auditor, so I look at this from the tax side, not as an investor. Not a reason to skip on a good out-of-state deal, just worth knowing before you wire money.

When you have invested outside your state, did the operator handle it, or did you file in that state yourself?