Arizona Non-Resident Return - Line 37 Capital Gains Acquired after 2011

[PCMarmot]

I am filing a non-resident return for Arizona to report Arizona sourced income and the NR-140 pulls capital gains from the 1040 into the smart worksheet. These gains are from the sale of investments and have nothing to do with rental income, thus they are not Arizona-sourced. I had entered $0 when asked for Arizona sourced capital gains earlier in the software. 

I believe the number on Line 37 of the form should be $0 as the capital gains are not Arizona sourced but the only way to achieve this is to say that the gains were acquired before 2012. 

Is this the correct way to handle this? 

TT does not appear to have the appropriate level of support to complete a state tax return correctly as there is no way to differentiate Arizona-sourced and cap gains in this portion of the step-by-step.

I found another entry from 2022 indicating this has been a longstanding problem that has yet to be addressed.

[AmyC]

Capital gains from purchases prior to 2011 are not taxed. That is an option to keep your gains from being taxed.

[PCMarmot]

Sure but why is this even a question on my non-resident return? The capital gains in question are not Arizona-sourced so why are they being reported on the form at all?

I am a resident of Pennsylvania for reference and moved here from Arizona in 2023.

[PCMarmot]

@AmyC To restate the problem I need to confirm that line 37 - net long-term capital gain for assets purchased after Dec 31, 2011, should be $0, as the capital gains on my Federal 1040 are from investments that were sold while I was living in Pennsylvania. 

The form does not ask if the cap gains are Arizona-sourced or not, and if I answer the questions accurately to reflect the cap gains from my fed 1040 then I will get a deduction from my rental income that I do not believe is supposed to be there...

[AmyC]

Thank you for the clarification. I thought the rental was rental income and not capital gain.

I am going through an AZ nonresident return with capital gains and rental income. The program wants zeroes filled in or a real number, do not leave blanks.

Capital gains

• The program asks you to allocate how much of the capital gains belongs to AZ.  
• Since your rental is part of the capital gains - I guess you sold it, then enter that amount in the gains section. 
• If no AZ capital gain, enter zero

The rental income that belongs to AZ should go in the rental section. Not sure how many rentals you have.

Then the program asks about other income and adjustments

Capital Gain from Assets Acquired After 2011 - enter your AZ portion of the capital gains.

I used $1,000 for AZ gains and $246 rental income. It shows correctly on the tax return. If you are trying to determine your capital gain from the sale, look at your federal Sch D. Sch E will show your rental income for the property.

[PCMarmot · Accepted solution]

Following up on this again as I want to be sure other readers understand who are in the same situation. I fixed the problem using the override feature in TurboTax Desktop to force $0 on line 37. 

Page 13 of the Arizona 140NR instruction packet for 2024 clearly states "As a nonresident, you may take the allowable subtraction for *only* those qualified net long-term capital gains that are from Arizona sources. You may subtract 25% of any qualifying net long-term capital gain included in your federal adjusted gross income that is derived from an investment in an asset acquired after December 31, 2011.

Likewise, the instructions on the 140 form are clear that lines 34-37 should all reflect only Arizona sourced gains and losses.

Because Lines A and E on the Smart Worksheet for this section are pre-filled, I am unable to change them. If I enter $0 on line G, then the full amount is shifted to Line F, which indicates assets were purchased before 2011 (this is not true). 

TurboTax is encouraging users to commit tax fraud by preventing them from filling the form out correctly. I would not have discovered this error had I not switched to forms mode so I can only assume that many tax payers have been led astray by TurboTax. 

For reference, the following screenshot shows how the Smart Worksheet is set up. The number on Line A is pulled from the Federal 1040 and cannot be changed. Line E is also unchangeable. Lines F and G are linked so if you enter $0 on one, the total populates to the other. 

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I spent hours on the phone with TurboTax trying to get this glitch fixed and at one point, customer service attempted to direct me to this thread, which I had initiated myself hours before and which remained unresolved, as a resolution. There was only one agent (Patricia) who offered any helpful advice and that was to use the override function. TurboTax will eventually have to own that their software has caused many people to underpay their taxes due to misallocation of a credit. 

[PCMarmot]

@AmyC unfortunately this is not the situation. The income I am reporting is indeed rental income (for two properties) and the properties have not been sold. 

The capital gains figure is being pulled from my Federal 1040 by TurboTax for no reason. I already entered $0 in the Arizona Income column for everything except for the rent. The figure is prepopulated into the smart worksheet for the capital gains credit and cannot be changed (see my previous post in this thread). 

The following screenshots show my information entered correctly for Arizona and the numbers that are outlined in green are pre-populated by TurboTax. 

This is a TurboTax error.