Active duty spouse residency for rental income on state taxes

[Taxfused]

I'm AD 2002-present & legal resident of Illinois. While stationed in NC, I met/married civilian wife & bought house in 2009 in NC where she currently maintains a driver's license & is registered to vote. Moved out of state in 2013 on orders and began renting the property via a property management company until Oct 2024 when we cash-sold the house. We never returned to the state once we left in 2013.

Question is, for any of the years (and which years specifically) the property was a rental since 2013, can my wife claim Illinois residency on state taxes and file joint along with me to report out-of-state rental income from NC instead of filing a resident return in NC, or is she required to file as a resident in NC & I have to file there as a non-resident AND with IL as a resident?

We have always filed married/joint on federal returns.

*It's unclear to me under the MSRRA & future acts of 2018 & 2022 if she can claim IL instead of NC due to the rental property being physically located in the state where she holds her driver's license and is registered to vote.

Thank you.

[Vanessa A]

There laws conflict with each other. 

Yes, you can file a joint Illinois return if you are filing a joint federal return.  However, NC basis her residency status off of her actual situation without regards to your situation.  This means since she lives there she is a resident there and has to file as a resident.  

You may find it easier to just file a resident state for yourself for IL and a Non Resident return for NC for the rental income reporting half of it and half of the expenses.  Then just have her file a Resident return for NC. 

What are my options for filing a joint return with my spouse? Spouses who file a joint federal return may elect to file a joint Illinois return. If you file a joint Illinois return, and one spouse is an Illinois resident while the other is not, both spouses must be treated as Illinois residents (or as part-year residents for the same period).


 

[SteamTrain]

@Taxfused 

I'd go with your other post answer...since you are not posted in NC anymore and your civilian spouse lives with you.  Is my active duty income taxable in my wife's legal residence state?

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You might need to visit with whatever Post Legal services are available to get this all worked out though, since we may not be cognizant of all situations for military couples......and just are aware of the basics for military tX situations.

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For instance...My take on your situation (just mine) is that, you/she should be choosing to claim her as being IL residency under MSRRA...Every year until you leave the service.  That subjects both of you to only MFJ IL taxation...and only one state tax return to file (except for any non-resident taxes on rental property income in the non-resident state....though that's apparently gone for 2025 taxes now....but not for 2024 and earlier).

....The issue for your civilian spouse, (my experience...but still an opinion, which is why I suggested using your post legal services)... is that she should not have been claiming NC residency in all those past years, once you were posted to a different state, and she went with you.   Before MSRRA, and even after...if she was not claiming IL residency with you, and you both moved to posts outside of NC, she then became a resident of that posting state, and would be required to file taxes in that new state...IF...if she had any income...and probably should not have been allowed to maintain Voting registration in NC either. 

Before MSRRA, that was always a complicating issue for the civilian spouse of a Military person...that civilian spouse had to become a resident of the new state, and file part-year taxes every time they moved to a post in a new state...that is...IF that civilian spouse had income...some states (particularly CA) even required the civilian spouse to get a Driver's License for the state they were posted to. 

MSRRA, (especially the second iteration of it) helped remove that complication by letting the civilian spouse claim residency in the Military spouse's state, no matter where they were posted, as long as they lived together at each posting.

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Thus, again, my suggestion to talk with you post legal services people , or perhaps a local professional tax person who may have been dealing with military couple situations for years  (and not one of those yearly pop-up locations)