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Nonresident Tax Return Filing Requirement

I am an Ohio resident with an investment (non-business, income-producing activity only) in Oklahoma starting in 2021.  My GROSS Oklahoma-source income from the investment is substantially higher than that $1000 filing threshold.  However, after depreciation deductions, the investment shows a loss for the year and will do so for the 5-year depreciable life of the property.  When I go to file, I am getting a "Not Required to File" error since I show no taxable income on the investment.   Also, the loss from the investment is being shown on the federal return (although it is not allowed this year due to passive activity rules, it must be carried forward), but it is shown nowhere on the Oklahoma return.  It just shows $0 income.   I assume that I still need to file a return to establish the investment and the loss so that it can be carried forward to future years.  I would think the loss should be shown somewhere on the Oklahoma return.  Am I correct in my thinking?  Am I doing something wrong?  Or do I really not need to file for 5 years until I show taxable income? 

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Accepted Solutions

Nonresident Tax Return Filing Requirement

@sidekickin Again I am not a CPA, but this is my understanding:

 

1. 2021 was the first year of your investment in Oklahoma. So yes, there are no years before 2021 to carry the loss back to. BUT if you plan to earn money from this investment in 2022, then you need to file a tax return to the State of OK to tell them you had a loss in 2021. That way, you will have the record of the loss in 2021 so that you can use your loss to carry it forward to 2022 and reduce your 2022 income. Ex: In 2021, you had a net loss of -$1000. In 2022, let's say you earned $5000. If you told OK in 2021 that you had the net loss of -$1000 in 2021, then you can carry it _forward_ and subtract that from your income in 2022. So then $5000 - $1000 = $4000. Then you are only taxed on $4000 in 2022.  If you don't file the -$1000 loss with OK in 2021, you can't tell them on your 2022 taxes, "Btw, I had a $1000 loss in 2021. I want to subtract that from my $5000 income in 2022." It would be too late then.

 

2. You may not be actively involved in your investment in OK. BUT if you are engaging in activity to make money, the State of OK (and the federal govt) consider that to be a "business" that you have. So for my example, I own a rent house in OK. For me, this is also a passive investment b/c I have a property manager who is actively involved in managing the property. And I do not spend enough time as defined by the IRS actively managing my investment. (The rule is something like if I spent more than 50% of my work time, including my job, managing my property in OK and elsewhere, and I meet some other IRS-defined tests, then I could be considered "actively involved" in a property management business. Use Google to learn more if you want.)

 

So back to my example. I just have a rental property as an investment. I do not spend enough hours or enough work to for the IRS to consider me to be "actively involved", so it a passive investment for me. BUT I still will make money from this passive investment in 2022. I hope to have a profit.  And since I filed in 2021 my operating loss (let's say it was -$1000), then when I file taxes in 2022, I can subtract this -$1000 from my income in 2022. Let's say it is $10,000 income/profit in 2022 (just to illustrate). Then when I file my taxes in 2022, I can take $10,000 - $1000 (loss from 2021) = $9000. So then I am only taxed on $9000 instead of $10,000. So even though I only have an investment and it is passive, in 2021, the -$1000 is still called an "operating loss" b/c this is a business, even though the IRS does not consider me to be actively involved in it. I hope that makes sense. And check with your own CPA on this. Good luck.

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28 Replies
PatriciaV
Employee Tax Expert

Nonresident Tax Return Filing Requirement

Please clarify which return you are preparing - individual or business? How was the Oklahoma investment activity reported to you? Or do you directly manage this activity?

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Nonresident Tax Return Filing Requirement

This is individual. This is a passive, income-producing investment only. I do not manage it in any way, shape, or form. I own the equipment, but the business making the rent payments to me takes care of all maintenance, insurance, etc. on the equipment. I am not involved other than owning the equipment. I receive a 1099-MISC for the payments. The amount shows up on Rents on the form. 

PatriciaV
Employee Tax Expert

Nonresident Tax Return Filing Requirement

Please clarify how you reported this activity on your TurboTax return in a way that connected the income to Oklahoma.

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Nonresident Tax Return Filing Requirement

@PatriciaV It is reported on Schedule E of the 1040 - "Supplemental Income and Loss" tied to an Oklahoma address.

PatriciaV
Employee Tax Expert

Nonresident Tax Return Filing Requirement

Since you have no net income from Oklahoma sources, you are not required to file an Oklahoma State Income tax return. This is why you are seeing the "Not Required to File" message. However, you do have the option to file anyway, either e-file if TurboTax will allow that or by mail (which may be easier). 

 

When you review Oklahoma Form 511NR, you should be able to follow the calculations that resulted in no reportable state income. Be sure to print and/or save the State tax documents along with your Federal return for your files.

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Nonresident Tax Return Filing Requirement

@PatriciaV The 511-NR packet I obtained from Oklahoma's website says that any nonresident with GROSS income over $1000 is required to file. The rents I received total substantially more than that, and I assume that is considered gross income. However, after depreciation deductions on the equipment, the net income is a loss. It will continue showing a loss for 5 years while it depreciates. Even if I am not required to file, I would assume that something would have to be filed with Oklahoma to establish the losses to be carried forward to future years. In this situation, considering the requirement than any nonresident with Oklahoma-sourced GROSS income of more than $1000 is required to file an Oklahoma return, do you still think I don't have a filing requirement? 

Nonresident Tax Return Filing Requirement

Your Gross revenue is over $1,000 but the Income is not (based on your post). If you look at page 5 of 511-NR, it says that the Oklahoma income includes "Net Rent."  That is after expenses and depreciation. You definitely do not have to file.

 

However you may still be allowed to file. If you look at that link on page 5, you will see that the loss year must be filed to establish the Oklahoma Net Operating Loss.

Nonresident Tax Return Filing Requirement

Schedule E states that it is for rental real estate. However, what I am renting out is not real estate. It is personal property/equipment. And it is not a business activity, so I know it shouldn't be on Schedule C. This is simply a passive income-producing investment. Should this be reported on another form? If this income should be on another form, what should that be? Will that affect how I show my depreciation deductions and losses?

JohnB5677
Employee Tax Expert

Nonresident Tax Return Filing Requirement

Yes, you should file an Oklahoma tax return, and yes it should be a Schedule E.  However, you have the incorrect classification for the rental income.

  1. In the initial interview, it asks What type of rental?
  2. There is a selection of four types of property rentals.
  3. Select SHOW MORE below those boxes
  4. Select Other = Continue
  5. Since it wasn't listed, describe the type = Equipment Rental
  6. Continue through the interview.
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Nonresident Tax Return Filing Requirement

I seem to be getting conflicting answers.  If I go through the process like @JohnB5677   says, it requires a physical address of the equipment as if that address is rental real estate.  The address where the equipment is currently located in Oklahoma is not rental real estate.  It is the address of the business I am renting the equipment to.  However, the equipment moves around the state during the year as needed.  To be clear, I do not materially participate in this activity, so it is not a business.  I simply own the equipment and the business that is renting it takes care of all maintenance, upkeep, repairs, and insurance.  According to the Form 1040 instructions, it says that rental of tangible personal property that is not conducted as a business should be reported on Schedule 1:

 

Line 8k (pg 87 of IRS Form 1040 instructions)
Income from the rental of personal
property if you engaged in the rental
for profit but were not in the business
of renting such property. Also see the
instructions for line 24b (Schedule 1), later.

Line 24b (pg 94 of IRS Form 1040 instructions)
Enter the deductible expenses related to
income reported on line 8k (Schedule 1) from the
rental of personal property engaged in
for profit.

 

Do you still think this income should be on Schedule E even though the IRS instructions state otherwise?  How do I show depreciation expenses on line 24b of Schedule 1? (It is 5-year depreciable equipment.) Since there is not a steady physical address for the equipment, is the income still taxable in Oklahoma?

 

Apparently, this is a very uncommon tax situation.  I just want to make sure I am reporting this correctly since this is the first year.

Nonresident Tax Return Filing Requirement

@JohnB5677 @ZoltanB45 @PatriciaV I should also mention that the rent being paid to me on this tangible personal property (which is converted shipping containers for agricultural use on farms in Oklahoma) is being paid on a 1099-MISC from a company based in California.  And I live in Ohio.  Does this factor in to which state it is taxable in?  

Nonresident Tax Return Filing Requirement

@JohnB5677 @ZoltanB45 @PatriciaV Doing a little research on the Oklahoma website, I've found out definitively that the income is indeed taxable in Oklahoma from being "tangible personal property located in the state." The issue continues to be that the income is rents from personal property (not real estate), i.e. personal equipment.  It is movable and not fixed to land, therefore not real estate. Schedule E is for real estate...it says so right at the top of the form.  Schedule C is not appropriate because this is not a business or "active" income.  According to IRS instructions (stated earlier) this must go on Schedule 1 along with the expenses (depreciation).  However, I don't see anywhere in the software to generate a Form 4562 (depreciation) with Schedule 1 and have the result show up on line 24b on Schedule 1.  This appears to be an oversight in the software, unless someone knows how to do this.  Does anyone know how to do this?  Or any suggestions on what to do?  TurboTax is supposed to be the best software available, so I would hope this can be done.  Otherwise, this software was money down the drain and I will have to file a paper return.

DianeW777
Employee Tax Expert

Nonresident Tax Return Filing Requirement

It's taxable to the state where you live. Schedule C is specifically designated for rental of personal property.  As you noted, it's not to be reported on Schedule E.

 

There are two possible ways to report rental of personal property.

  1. If you decide this is a business activity (self employment) for you, then you can deduct the expenses necessary to operate the activity of renting your trailer.  This would include depreciation of the trailer over a 7year recovery period (deduct a port of the cost each year) or an election to expense it all in the first year. You can also deduct interest on the loan and any other expenses necessary to maintain the trailer available for rent.
  2. If you decide this is not a business activity and it is something that is done on rare occasions then you should report it as 'Less Common Income'. Here you can enter the income and the deductions (limited to income).  This will populate on the Form 1040, from Schedule 1.

Personal Property Rentals (IRS Topic 414)

  • Report income and expenses related to personal property rentals on Schedule C, as self employment, if you're in the business of renting personal property.
  • Report income on line 8k and expenses on line 24b of Schedule 1, if you're not in the business of renting personal property.

@sidekickin

[Edited: 03/11/2022 | 1:40p PST]

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Nonresident Tax Return Filing Requirement

@DianeW777 Thank you for the information. It is a 5-year depreciable asset/equipment located in Oklahoma. I live in Ohio. It is not a business at all, but I receive quarterly payments for rental. I simply own the equipment and all expenses, taxes, maintenance, insurance, upkeep is taken care of by the person renting it. It is completely passive for me.  I am not involved other than receiving the quarterly rent payments.  Are you saying that I am not able to depreciate the 5-year asset unless I am in the business of renting equipment? Line 24b of Schedule 1 allows for deductions for expenses related to rental of personal property that is engaged in for profit that's not a business. I assume depreciation would go there.

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