I have a CA rental property generating loss, do I need to file CA tax return?

[zxl9171]

I have a rental property in CA, it's generating paper loss. 

I don't have any other income from CA.

I didn't step into CA for the whole year.

I have filed my federal return and it's accepted.

The CA state tax return will be $0 since no income and no withhold. 

Must I file CA tax return?

My income exceeds the limit to use CalFile so I have to pay for other software to E-file, which doesn't make sense to file a 0 with extra cost.

[jtax]

This is a very good question.

I think you probably have to file, but you can review the info below and decide (or consult a professional).

See 

https://www.ftb.ca.gov/file/personal/residency-status/part-year-and-nonresident.html#Filing-requirem...

there are two tests. Both involve gross income not net income. While your net CA income is negative, your gross income is positive if you received any rent during the year.

The two tests involve 1) worldwide income and 2) California income. CA income is AGI, so there might be some deductions allowed. Not sure. 

This article from an attorney addresses your question and says "even a dollar of California source gross rental income earned by a nonresident individual requires the filing of a California individual nonresident income tax return each year that rent is received (even if no tax is due after allowable deductions are taken into account)."

[zxl9171]

Thanks for the informational reply!

I also found the two tests and seems if any of them are met, I need to file.(I’m a little bit confused, if it’s ANY but not BOTH, everyone in the world should file CA tax?)

I definitely passed the first test for worldwide income, while the second test I’m not sure. 
In form 540NR, the rental income is determined by Schedule E from form 1040, which is $0 since passive loss cannot exceed passive income. So basically if I file, I would file a all $0 540NR with my 1040 attached, that doesn’t make sense to me.

Thinking in another way, what’s the consequence if I don’t file? CA will find I have an 1099-MISC for rental income, then they will pull my 1040 from IRS, and found the rental income was $0 on schedule E, will they fine me for not filing? I feel since I don’t owe, they cannot fine me, but please correct me if I’m wrong.

[PatriciaV]

If you had California-sourced income, you should file a California state tax return. Even if you ultimately owe no state income tax, the requirement is to file a return.

Check the California FTB website for e-filing options: California eFile Options

[jtax]

Thanks for the informational reply!

I also found the two tests and seems if any of them are met, I need to file.(I’m a little bit confused, if it’s ANY but not BOTH, everyone in the world should file CA tax?)

I definitely passed the first test for worldwide income, while the second test I’m not sure. 

I understand the confusion. Taxes are complex and have a lot of "hidden" assumptions. See https://www.ftb.ca.gov/file/personal/do-you-need-to-file.html

Basically the tests only apply to non-residents if you have any CA source income (e.g. rental property in CA, personal services performed in CA, etc.). If you don't CA won't tax you at all and the worldwide income test doesn't apply.  Legally CA would have no "personal jurisdiction" to write a law covering a non-resident without CA source income. It wouldn't be constitutional because of the 5th amendment's due process requirement and your not having sufficient ties to CA.

(The worldwide income test  would also apply if you were a part-year resident because while a resident a state will tax you on your worldwide income).

In form 540NR, the rental income is determined by Schedule E from form 1040, which is $0 since passive loss cannot exceed passive income. So basically if I file, I would file a all $0 540NR with my 1040 attached, that doesn’t make sense to me.

Thinking in another way, what’s the consequence if I don’t file? CA will find I have an 1099-MISC for rental income, then they will pull my 1040 from IRS, and found the rental income was $0 on schedule E, will they fine me for not filing? I feel since I don’t owe, they cannot fine me, but please correct me if I’m wrong.

No one can give you advice to not follow the law. That is your choice. 

They might never find you. Or they could find you in a couple of years and you might get fined or at least have to do a bit of back and forth with the tax people. Never fun. To find out the consequences you would need to talk to a CA tax professional for legal advice (not random volunteer Internet forum posts).

I will point out that if you use TT for your federal return and home state, it is very easy to just add a state. And the cost is small compared to any real estate in CA, I'd think.

Also if you do that TT will, over the years, keep track of things like depreciation, etc. and will deal with the capital gains taxes and depreciation recapture when you sell (both federal, home state, and CA). That's worth it alone. Otherwise when you sell it could well be a mess to figure out. Sometimes state numbers  are not the same as federal numbers.

I would be hesitant to manually fill out a CA form. You want to be sure any CA specific info about the rental/depreciation/etc. are correctly done and included.

If you don't want to pay the efile fee, you can print out and mail the CA return. (Always mail with certified mail. no need for return receipt. Just keep the green receipt and be sure it is postmarked by a postal employee.)