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Which state should rental income be paid in?

Laguna Niguel, CA |

I live and work in California but have rental properties in other states like AZ, NC, MS etc. I have been reporting rental income on Federal and California State tax returns for the last 5 years. I usually get a tax refund so don't pay taxes with my filed returns. Should I be filing tax returns with the states that I have rental properties in and would I pay state tax to them instead of California? None of the other states have chased me for an income tax return, but if I should have been filing with the other states, would it be in my best interests to now file amended returns with California and report the income to the states where I own the property? I file as an individual but plan to move properties to a 'C' corp this year.

Attorney Answers 3

Posted

The states in which your rental properties are located have jurisdiction over the income generated from such properties -- so your business may have income tax liability in these other states. Since it appears that you own the properties in your own name, then you may have to file personal income tax returns in such other states. This is a tricky situation because you may be subject to penalties and interest in such other states for failing to file a tax return with their state tax authority. I also note that your plan to use a C corp may be inefficient from a tax perspective as well and there are other alternative structures that you may want to consider.

With respect to California, consider filing amended returns to accurately reflect any income taxes paid to other states. Note that you may not be entitled to a refund of California income taxes for the earliest years since you would be filing an amended tax return for a tax year that is 4 to 5 years old (there are statutes of limitations that may apply to your situation that would prevent the state from paying/crediting you a tax refund). This is not a DIY situation. Consider hiring an attorney to guide you through the process to appropriately structure your real estate investments.

Any comments posted on this site are for your general information and are not a substitute for professional legal representation. Please consult an attorney to adequately address your legal issue(s).

Oscar Javier Ornelas
915-600-7286
oscar@ojotax.com

Anything contained in this response is for informational purposes only and neither the author nor The Ornelas Firm PLLC ("Firm") makes any representations as to the accuracy or completeness of anything contained in this response. Nothing herein shall be interpreted as legal advice from the author or the Firm, or as creating an attorney-client relationship between the solicitor and the author or the Firm. Neither the author nor the Firm will be liable for any losses, injuries, or damages from the display or use of this information. You should consult an attorney whenever confronted with a serious legal issue. The Ornelas Firm PLLC (www.ojotax.com) may be contacted at 888-764-5822 or oscar@ojotax.com.

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Richard Gordon Stack

Richard Gordon Stack

Posted

As Mr. Ornelas has stated, you may need to file delinquent returns in the other states where you own real properties, although it is quite possible that may not have realized any net income from those properties for tax purposes. Nevertheless, I would consult an experienced CPA/lawyer familiar experienced in handling multi-state tax matters and in forming entities, such as subchapter S corporations and LLCs.

Posted

I agree with my colleague .
There are many issues that need to be consider and evaluate by an attorney that assist you in order not to be liable for tax evasion or even fraud by the tax authorities of different states.
You need a lawyer that is a Fraud Examiner and can assist you to protect yourself from potential state tax fraud.Some of spas in avvo are fraud examiners that can assist with those issues

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Posted

Mr. Ornelas, though he is not licensed in California, has given you a superb response.

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