Removing a large capital gain from taxable income on my state return

[peknapp]

I'm using TurboTax Home&Business and working on my Oklahoma return, though I think this question would apply to most other states...  Full-time resident in OK.  Income is from W-2, 1099-R, 1099-INT and DIV and stock brokerage transactions.

We sold a vacation property in ANOTHER STATE for a large capital gain.  Anticipating this, we had our stock broker do some tax loss harvesting in our brokerage account to partially offset the capital gain on our federal return, which worked out as expected.

Working on the state return, one of the first questions asked is if there is income from another state that is not taxable in my home state (Oklahoma).  Yes, it is this large capital gain on the property sale.  Our Federal Schedule D is thus a mixture of short and long term gains and losses in the brokerage account and the gain on the property sale.  On the state return, if I ignore the gain on the property, I am still left with a sizable capital loss from the stock harvesting which, along with other Oklahoma deductions and exemptions, zeroes out all my other income.

This doesn't seem right, because if there wasn't the gain on the property sale, then all those harvested losses would be limited to $3000?  I'm at a loss on how to handle this.  Any guidance is much appreciated.

Thanks

[Mike9241]

sorry based on most state income tax laws, since the property was located in state Y while you are a resident of OK, none of the other capital transactions would properly be allocated to state Y. However, the gain is also taxable in OK because you are a resident there.

Thus you owe state Y whatever the tax is on the gain on the sale of that property while for OK the gain is washed out by your other capital losses. 

 your OK return may allow for a full or partial credit for the taxes paid to Y.

This is generally true. if you are a resident of state X with an individual income tax you are taxed on all your income even income earned on property or businesses located out of state. if that other stat also imposes an income tax on the same income your home state generally allows a full or partial credit for the doub;le-taxed income at the state/local  level 

[peknapp]

Mike,

Thanks for the quick feedback.  I've looked closer at my state's line-by-line instructions.  

This is the instruction for Line 4, Out-of-State Income:
"This is income from real or tangible personal property or business income in another state. This includes partnership gains and gains sustained by S corporations attributable to other states.  It is not non-business interest or dividends, installment sale interest, salary/wages, pensions, unemployment compensation, gambling or income from personal services. (See instructions for line 16.)  Provide a brief description of the type of out-of-state income deducted.  Provide detailed schedule showing the type, nature and source of the income and copy of federal return.  Documents submitted should reflect to which state(s) the income is attributable. Provide the other state’s return  and/or Schedule K-1, if applicable."

Oklahoma does have a form 511-TX for claiming credit for taxes paid out-of-state, but per its instructions, it seems limited to only wages earned out of state:

"Line 1 Include:
• Only the amount of wages, salaries, commissions and other pay for personal services that is being taxed by Oklahoma and also the other state.  Gambling winnings are considered income from personal services for purposes of this credit.  Part-Year Residents include only the income for personal services that is included in the “Oklahoma Amount” column of Form 511-NR and that was also taxed by another state.
Do NOT Include:
• Income that is not compensation for personal services such as interest, dividends, taxable refunds, unemployment compensation, rental income and oil and gas royalty income.
- or -
• Retirement benefits that the nonresident state is prohibited from taxing such as IRA distributions, pensions and annuities."

My interpretation is that in Oklahoma, I'm back to my original question.

[RobertB4444 · Accepted solution]

@Mike9241 is correct.  In your case you will report the property sale to the other state and pay any taxes due.  Because the stock loss that you used to offset the gains on your federal return is not available to you in the other state you will pay taxes on the full gain.

In Oklahoma you will also report the full sale.  And, because you are an Oklahoma resident your loss offsets the gain in Oklahoma you won't have to pay taxes on the gain in Oklahoma.  Which is good because Oklahoma does not offer you a credit for the taxes that you paid to that other state on your investment income.  Some states do.  Oklahoma isn't one of them.  If you hadn't had that loss to offset your gain you would have paid tax on the same income twice.  

@peknapp