Sold out-of-state rental property but failed to file nonresident return for rental in previous years

[turbotax3]

It appears I've made an oversight for the last few years. I had a rental property in different state than I live in. The property had little net income over the last few years (<$5k). Each year when preparing my taxes in TurboTax, I think I would see a message saying something along the lines of: You may need to file a return in another state. And I expected that TurboTax would actually prompt me to add that state return along the way if necessary. I was never prompted, so I never added the state return for the state the property is in.

I'm guessing this means that the income (and loss) from the out-of-state rental was just being applied to my home state each year. And I'm guessing now that maybe I needed to manually add the return for the state of the property?

Well, now I've sold this property and made some money on the sale. And I guess it was more clear to me this year that I might be filing a return for that state, so I selected that state during the initial interview. This time around, TurboTax did prompt me to file a return for that state.

So I think my question is: Is there anything I should consider doing in that state besides just filing my return this year?

Thanks!

[MaryK4]

You may want to go back and amend the returns that you had income for the state if required.  

[turbotax3]

The "if required" part is maybe where I'm tripped up. And this may be a subjective question, but based on anyone's experience and expertise...

• Is it worth the hassle to me and to that state to go back and file returns for the last several years?
  • Is that still called "amending" the return if I never filed one in the first place?
  • What factors could help determine if it's worth doing this?
• And I would then also need/want to amend the returns for my home state as well for each of those years?

[DavidD66]

If you had net rental income from that property you should definitely file the prior years' tax returns for that state.  You will not be amending if you never filed them.  If you have unallowed passive losses that you have been carrying forward and are now using to reduce any gain on the sale, since you never filed returns showing the loss with the state they may disallow the loss.  You can try filing without having filed any prior year returns and see what happens, but I recommend filing the prior year state tax returns.  

[turbotax3]

Thank you. I appreciate the insight.

Some follow-ups:

1. I'm not claiming any carryover losses this year. I DID have losses on the property last year, but they were offset by other gains and didn't carryover. This of course was not filed in the property state but in my home state last year.
2. How many prior years would you recommend filing with the property state? However many is the statute of limitations for the state (so 3)? Or all missed returns (say 6)?
3. And would you then also recommend amending my returns in my home state?
4. And a different question that I can't find a good answer to: How does the property state know to expect a return from me when the property is sold? To be clear, I'm not planning to do this but am just curious: since I haven't filed a return for a while, is the state more likely to notice me not filing a return in the year the property is sold?

Thank you again!

[turbotax3]

It looks like the questions in the previous post may be hard to answer. I'd certainly appreciate any insight into those questions if possible.

But I also have another question: HOW exactly do I file prior year state returns?

I've looked around TurboTax and found options to amend prior returns. But I don't see how to just file a return for another state.

[DianeW777]

Yes, you should amend what you can. The amended returns can be filed for 2021 (last date is April 15, 2025), 2022 and 2023 (following years respectively, 2026, 2027). 

Key Information: Yes, this could mean you must amend your own resident state return, but only if you actually have tax in the state where the property is situated. Otherwise there is no need to amend your resident state.

You can be sure that every state knows when property is sold because it is recorded in a city or county courthouse. The State Department of Revenue will be connected to such sales in some way, whether by being notified or by their continued review.

Each state has different filing requirements, some more stringent than others. The link below will give you information for 2024 and you can see what the state requires where your property is located. 

• Do I need to file a state return?

Key Information: Some states required you to file if you are a nonresident and have any income derived from their state. Some states require filing if the gross (not net) income is higher than a certain amount. And some states don't require a return if the net income is below the filing requirement or zero.

Every state return begins with the federal return so you can start with the federal returns you already filed for those years.

• How do I amend a prior year state return? (you're actually preparing the original)

@turbotax3 

[turbotax3]

Thank you. This is very helpful.

I've been able to amend the return to add the additional state return and amend the home state return when applicable. Would you expect that I would need to file an amended federal return as well? Or just the state returns?

And if no federal amended return is required, am I able to only e-file only the state returns without the federal return? (both states DO allow e-filing)

[PatriciaV]

If your federal returns need no changes, you would not amend prior year federal returns.

You will need to file the prior year state returns by mail. The e-filing period is over for all tax years except 2024.