Non-resident sale of California home seems wrong

[TomFx37]

I sold a home in California after moving to Arizona. I'm reasonably certain that my situation requires payment of California non-resident sales tax (it qualifies for the primary residence exemption, but the profit was more than the exemption).

This was for tax year 2019, and I used TurboTax Premier 2019 (home computer version).

I moved to Arizona in late 2018 and was an Arizona resident for all of 2019.

I answered all the questions TurboTax asked on the home sale interview.

When I did this, TurboTax shows that I don't owe tax to California for this home sale.

In the California State Turbotax, using the "Forms" view, I looked at the California Schedule D Worksheet for Nonresidents and Part-Year Residents. In the "Part I" section of that form "Worksheet to Allocate Capital Gains/Losses Sale by Sale", there is line with "Description of property" as "Home Sale Gain Realized" with a CORRECT entry in Column A ("as if you were a CA resident for the entire year"), but Column B ("as if you were a nonresident for the entire year") is BLANK. This seems to be WRONG, but I can't figure out anything I did wrong in the interview and I can't find any way of correcting it.

I am being taxed on the Arizona State Turbotax for the capital gain on the house sale. Is it possible that California and Arizona have some kind of agreement for transferring tax collected in Arizona to California? I know I shouldn't pay taxes to both states, but it seems I should be paying California and not Arizona.

[DanielV01 · Accepted solution]

While I can't verify as to exactly how this was reported on your state tax returns, I can confirm that there is an arrangement between Arizona and California.  California and Arizona are reverse credit states.  Normally, as you suggest, when you have income from a non-resident state (such as selling the home in California when you live in Arizona), the non-resident state (California) taxes the income first, and then the resident state provides a credit for the amount of tax you pay to the nonresident state, up to the amount that the resident state taxes the same income.  

With reverse credit states, the opposite is true.  Arizona will simply tax all of your income, and then California will give you a credit for the amount of income you derived from California (the sale of the house).  If Arizona tax is equal to or greater than California tax on that income, you will not have a California tax liability.  

I can't confirm that that is what you see on your tax return, but it is an actual provision and is what should be reported.  Also note that this is in regards to taxes reported due to state income taxes (including capital gains).  If you are speaking about a real estate or property tax, that is something else that is not reconciled through the tax return.

[TomFx37]

Thanks! This is a tremendous help. I still have the problem that I'm not sure the California filing is actually correct, because I think Arizona has a lower tax rate than California. Also, the Arizona form doesn't have a separate entry for income from other-state sources so the LT cap gain from the home sale is just lumped in with other LT cap gain. This is certainly confusing so we it would really helpful if the TurboTax program explained what it is doing. I'll just assume that TurboTax did the right thing and let California try to get what it's owed from Arizona.

[TomFx37]

I checked the California tax rates and they are much higher than the Arizona rate for the amount of gain I made from the home sale. It therefore seems that I owe a tax payment to California that is NOT present in my California tax return.

This means that I think TurboTax made a mistake in filling out my return. If you know how I can communicate with some part of the Intuit / TurboTax team to get this issue more fully resolved I would appreciate it. It seems to me that if this is a bug in the TurboTax software, it is a large potential liability for the company.

[RobertB4444]

You are probably better off having someone walk through the return with you to look at your entries so I recommend getting live expert help.

Here is a link to finding a TurboTax expert.

However, that requires upgrading your product which may be an expense you don't want.  In that case you can call an expert and ask questions over the phone.

Here is a link to the TurboTax Phone Number.

As something to keep in mind, California uses your entire income to figure the amount of non-resident taxes due, so they will also use the entire amount of tax paid to Arizona to figure the exclusion.  It sounds to me like that is probably what has happened here.  I don't think you owe any taxes to California (although you should definitely file the return so that they know that).