Turbotax premier desktop put rental property loss/gain in an incorrect state

[lzl1024]

I live in CA and have rental properties in NC (Never live in NC last year). When I trying to add rental property in Turbox tax desktop, even if I set Rental Property "State or U.S. Possession" to NC, it always assign to CA and prepare CA schedule E worksheet. Since I do not have other incomes in NC, it left my NC state filing almost blank.

Is there a way to change that? What should I do to make Turboxtax knows it should prepare NC schedule E worksheet and other forms for properties in NC?

I did some tests by creating a blank new return and mocked a NC rental property with a large amount of rental income. It seems I only owe tax for CA and Federal but not for NC. Am I missed anything?

[KrisD15]

Please delete the California state return. 

Start a non-resident State return for North Carolina and allocate the rental income to that state. 

Finally, compute the California State return. 

The program needs to have the information about the non-resident state first so it can apply credit for taxes paid to another state on the resident state return if applicable. 

[lzl1024]

@KrisD15 @Carl  May I ask how can I "allocate the rental income to that state"? 

I deleted CA and NC tax return and no matter what I put in the rental income, NC tax return is still 0 and owe CA tax whenever I add CA back.

I have changed my "Other State income" by adding NC.

Also property address is in NC and I tried to modified1099-misc with state of NC, but still does not work.

[Carl]

When dealing with multiple state tax returns, always do the resident state return last. Otherwise, allocations will be wrong and you'll be double-taxed in each state. Do the resident state last, so the program already "knows" what the correct allocations are and can therefore correctly reciprocate on the resident state return.

[Carl]

Understand that the resident state, taxes you on all income from all sources, regardless of where it's from. But the resident state will also "take into account" taxes paid to another state. Sometimes it will be a dollar for dollar reduction in the resident state tax, for taxes paid to the non-resident state. Sometimes it's different.

Also note that for long term residential rental property, it is not common to actually show a taxable profit. When you add up the common deductions of mortgage interest, property taxes, property insurance and add that to the depreciation you are required to take, that will almost always exceed your total rental income for the year. Add to that the other allowed rental expenses (repairs, maintenance, etc.) and you're practically guaranteed to show a loss on the SCH E line 26.

So not only will you not pay taxes to the non-resident state, you also won't pay taxes on that specific rental income to the resident state either. Now this is not always true. But for more than 99% of the time, it is.

[lzl1024]

Thanks for the answer @Carl,  sorry but I still have two questions.

1. I started a blank tax return. And only entered a fake 10M rental income with a fake NC property to make sure it is not a loss. And it turned out I owe CA tax of 1.3M but owe NC 0 . Is this expected? Shouldn't I owe tax for both NC and CA (primarily in NC and CA take the rest since CA has higher tax bracket)? Or CA go first since it is the resident state. Or is there any step that I did was incorrect? 

2. Looks like NC forms does not have any information about rental loss. It is only in the federal tax schedule E and CA schedule E worksheets. I suppose one day when I sell the property and get a gain, I just need to enter the carryover loss from the federal return to offset the gain.

Thanks!

[Critter-3]

Even if you have no taxable income to NC you should still file the return to preserve any losses.

Then CA will also be taxing the NC rental ... as a CA resident they do tax all your income from all sources so you cannot remove the Sch E.  

[Carl]

I'm not really "up to snuff" on state taxes all that much, because my state does not tax personal income and never has. But if you sold property in NC at a gain, you'll report it on both NC and CA returns, and you will pay taxes on that gain to NC. The CA tax on that specific gain "might" be reduced, if CA has a reciprocal tax agreement of some sort with NC. I don't know if they do or not.

Finally, when dealing with multiple state tax returns, do the resident state return *LAST*. Otherwise, if any reciprocal tax agreements exists between any of the states you're filing for, those agreements can not be "taken into account" by the program.

For long term residential rental property, it is not common to show a profit on SCH E. Especially if there's a mortgage on the property. It's more common to actually show ever increasing losses with each passing year the property is rented. Typically, there is no taxable gain until the year you sell the property; and only if you actually sell at a gain.