3

I am a non-resident with some commercial real estate income in Arizona, and I'm trying to figure out if I need to file there.

It says that you have to file if your gross income is > $15,000, and then gives the following instructions for determining gross income:

For Arizona filing purposes, figure your gross income the same as you would figure your gross income for federal income tax filing purposes.

Does this mean federal gross income >$15K - i.e., Form 1040, line 22?

Does it just refer to Arizona gross income (i.e., before adjustments)?

I have been unable to figure out the right way to calculate this.

2

Disclaimer: I am not a tax professional. Please don't rely on this answer in lieu of professional advice.

If your sole source of Arizona income is your commercial property, use the number on line 17 of your federal form 1040. This number is derived from your federal Schedule E. If you have multiple properties (or other business income from S corporations or LLCs), use only the Schedule E amount pertaining to the AZ property.

0

I would suggest reading through page 1 of the Arizona Nonresident form instructions at the web address below:

https://www.azdor.gov/Portals/0/ADOR-forms/TY2015/10100/10177_inst.pdf

To quote: "You are subject to Arizona income tax on all income derived from Arizona sources. If you are in this state for a temporary or transitory purpose or did not live in Arizona but received income from sources within Arizona during 2015, you are subject to Arizona tax. Income from Arizona sources includes the following:

...the sale of Arizona real estate..."

-1

Many states have a simple method for assessing income tax on nonresidents. If you have $X income in State A where you claim nonresident status and $Y income overall, then you owe State A a fraction (X/Y) of the income tax that would have been due on $Y income had you been a resident of State A. In other words, compute the state income tax on $Y as per State A rules, and send us (X/Y) of that amount. If you are a resident of State B, then State B will tax you on $Y but give you some credit for taxes paid to State A.

Thus, you might be required to file a State A income tax return regardless of how small $X is. As a practical matter, many commercial real-estate investments are set up as limited partnerships in which most of the annual taxable income is a small amount of portfolio income (usually interest income that you report on Schedule B of Form 1040), and the annual bottom line is lots of passive losses which the limited partners report (but do not get to deduct) on the Federal return. As a result, State A is unlikely to come after you for the tax on, say, $100 of interest income each year because it will cost them more to go after you than they will recover from you. But, when the real estate is sold, there will (hopefully) be a big capital gain, most of which will be sheltered from Federal tax since the passive losses finally get to be deducted. At this point, State A is not only owed a lot of money (it knows nothing of your passive losses etc) but, after it processes the income tax return that you filed for that year, it will likely demand that you file income tax returns for previous years as well.

  • 1
    No, this is not how it works. In the OP's case, he is only taxed by Arizona on Arizona-based income (net income from his commercial real estate). Arizona does not tax him on any capital gains on this property as long as he remains a non-resident. – Tony the Pony Feb 25 '12 at 17:43
  • 1
    @TheEnglishChicken I am not familiar with Arizona tax law, and will bow to your superior knowledge in this matter. But I have personal experience with a limited-partnership commercial real-estate holding in a different state (which was not my state of residence) and this state did tax my capital gains on the transaction, and did demand that tax returns be filed for previous years. As I remember it, I would not have been taxed on distributions paid by a mutual fund run by a brokerage headquartered in that state, but income definitively generated in the state was taxable, resident or not. – Dilip Sarwate Feb 25 '12 at 20:35
  • Looks like my "superior knowledge" might not be worth chicken feed -- things are in fact a bit more muddy in Arizona regarding capital gains, so the OP may be liable for AZ capital gains tax even as a non-resident, similar to your situation. (The good news is that AZ appears to recognize the same tax deferments allowed at the federal level, such as 1031 exchanges). Thanks for sharing an actual case, this is an important caveat. – Tony the Pony Feb 25 '12 at 22:08
  • So, you think that the gross income that it is referring to is my federal gross income? – Jeremy Feb 26 '12 at 15:01
  • Since at least two people, who presumably have much more knowledge about Arizona tax law that I do, have already down-voted my answer, I think it best that you wait for one of them to enlighten you. – Dilip Sarwate Feb 26 '12 at 16:06

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.