K-1 Distributions and State Taxes

[naviator2003]

I bought shares in a limited partnership last year, and have received the K-1's to do the state tax returns.  All states are reporting a loss. After reading a few posts here, I understand that I don't have a requirement to file Non-Resident Tax Return in the states that have losses (unless the state specifically says to). However, after contacting one of the states, their department of revenue stated that, if I wanted to claim passive activity losses later, that I have to file a tax return for every previous year in which I had losses that I am claiming.

Question #1: Do I truly have to file a state tax return every year I have losses (Non-Resident)? Why wouldn't I just file a tax return in the year I have income (vice loss), and include all of the previous years' K-1's showing my passive activity losses?

Another issue: For one of my state's K-1, in particular, it says I had a Distribution ($1). However, my K-1 for my state of residence shows Distributions in the amount of $580, which equals the Distributions listed on my Federal K-1.

Question #2: How can my state of residence K-1 show Distributions equal to what is listed on my Federal K-1, with other states also showing Distributions greater than zero?

Question #3: Am I required to report the Distributions on my Non-Resident state tax returns? If so, how/where would that get reported (the K-1 instructions state to not report this in taxable income)?

[M-MTax]

Don't worry about distributions that don't exceed your basis being taxed because they've already been reported and taxed earlier.

State issues are a problem sometimes but for most you can't hit them with the total losses for all years you've held the investment.....you have to report losses each year. If you'll never have any gain for a NR state you don't have to report the losses.

[Mike9241]

distributions aren't taxable unless your tax basis is reduced below $0. as for filing in nonresident states. some allow the carryover of losses. but it's only important if there is eventually income attributable to that state. if you don't file returns every year to report those losses, the state would likely disallow any loss you tried to claim to offset income reported in a future year.  this can be significant if the entity is engaged in rental real estate and sells property in a state in which you don't reside.  if you don't file those loss year returns, those losses will not be available to offset any gain from the sale. 

[naviator2003]

@M-MTax Thanks for your reply, and thank you for confirming that yes, if I want to claim the losses, I must submit a return for each year I have losses that I wish to claim. 

Your last statement also makes sense. If I sell the stock before I have a gain, then there is nothing I can claim against the states, and, as such, no need to file the returns.

With that, should I decide to hold onto the stock, would it make sense to simply wait to file all of the previous year tax returns for the states until I have a gain, then file everything all at once?

[naviator2003]

@Mike9241 Thanks for your response, as well. Makes sense!

[Mike9241]

it may surprise you but I've come across a few states that didn't allow loss carryovers for non-residents. this was many years ago and the law for those few states may have changed.

don't wait to file. most if not all states have the same 3-year statute of limitations that the IRS has. if you don't file within its set time limit then it would disallow any loss on any return filed afterward. you could wait say two years past the original filing deadline but things happen. what I would suggest is to take a look at the amount of the loss for each nonresident state.  you can then probably GOOGLE the tax rate in the state so you can find the potential tax savings of the loss.  since Turbotax charges for state returns, ask yourself if it makes sense to file if the costs of filing are about the same or more than the eventual tax savings of the loss.  professionally, what the firms I worked for did in practice was to not file returns if the tax value of the loss was less than the fees (what would be charged for preparation time + the pass-through of what was charged by the software provider for using their software for the state).  Once the loss became significant enough to file (assuming the state allowed a loss carryforward)  we would continue to file subsequent years regardless of the k-1 amount to preserve loss carryovers.  it was really a guessing game. in some cases we were right in others not because there was never any income in that state.  

[WSO]

Many of the TT state interviews don't provide a page to annotate the state specific income/loss for K-1 rental properties.  Going into forms I see they just carry over the K-1 amounts from the federal return.  How can these be adjusted?

[plawlor78]

@Mike9241 @M-MTax 

Thanks for your answers. I didn't realize that we are supposed to file taxes in nonresident states even when we had K-1 losses in order the use the carryforward losses later when I had income. What are my options if I have not been filing these state taxes? I appreciate the help.

[Mike9241]

I can't help with regards to state income taxes except Illinois. Not all states allow losses to be carried forward and the laws vary as to wether loss tear returns need to be filed. IL is one of the states that both permits passive loss carryforwards (unlike Pennsylvania) and doesn't require a loss-year return to report the carryover to them (unlike California).

so post the name(s)  of the state or states and someone more familiar with their tax laws should be able to assist you. 

[plawlor78]

Thanks @Mike.

I have received state K-1s for Oregon, Montana, Missouri, and California. I'm a California resident.

I have 5 different investments, so 5 different federal K-1s:

1. Oregon property; receive Oregon K-1
2. Oregon property; receive Oregon and California K-1 -- California has adjustments
3. Missouri property; receive Missouri K-1
4. Oregon, Washington, and Montana property; receive Oregon, Montana, Arizona, New Jersey, and New York K-1s -- No values for Arizona, New York, or New Jersey K-1s
5. Texas property; no state K-1

Washington and Texas do not have income tax, so no K-1s for those states.