The property shows up in the Alabama as capital gain instead of California where the property is located. Federal tax doesn't care where it is but I cant get the state taxes to reflect properly. How to I switch it.
The gain from the rental property sale does belong on the resident state return, where all worldwide income is taxed. The nonresident state of CA also will tax this gain because the property is located there.
The best way to explain how the tax credit works (taxes paid to another state on the same income) is shown below. Your resident state does not want you to pay tax twice on the same income so they provide a credit. Prepare your nonresident state return first, then prepare your resident state return.
If your resident state tax is a higher rate, then all of the tax paid to the nonresident state will be applied. If the nonresident state tax withholding is at a lower rate than your resident state you will make up the difference when all the calculations are complete. In reverse, if the state withholding on your nonresident state is at a higher rate than your resident state, you do not get the difference refunded unless the withholding was more than you tax liability for that nonresident state. Your resident state will not refund any money they never received.
Summary of Credit for Taxes Paid to Other State
The credit for taxes paid to another state on the same income is used on your resident state because they do not want you to pay taxes twice on the same income. As the resident state all worldwide income must be included.
The credit for tax paid to another state on the same income will be the lesser of:
You should select the residency information, and AL as your resident state. Continue through the state section until you can enter the capital gain taxable to CA. There are several screens before this comes up.