Non-Resident State Taxes

I've written a lot on establishing a tax home in a low-tax or no-tax state, such as Texas, Florida, Nevada or Washington. While that kind of step exempts most kinds of investment income from state income taxes, it doesn't necessarily eliminate state taxes on income that was earned within a taxable state from services rendered or from property located inside that state. Rent income earned from a property located in a taxable state has to be reported on a tax return with that state, regardless of where the owner lives.

Likewise, when property inside a taxable state is sold, a tax return has to be filed reporting the resulting profit, loss or tax deferred exchange that was done. For example, we have helped hundreds of people dispose of high gain real estate located in the PRC and reinvest the proceeds into new properties in low or tax free states. All of the tax on the profits from the PRC properties is deferred and rolled over into the replacement property. If those people ever sell the replacement property and don't do a 1031 exchange, they will technically have to report the previously deferred gain to the PRC and pay the tax on that. However, there is an element of the honor system in this because if the property is located in another state, the California Franchise Tax Board will literally be out of the loop in terms of knowing anything about the sale, unlike the situation for sales of California property.

Compensation for personal services is a little trickier and depends on how your employer reports it. As this article in the Wall Street Journal discusses, many states have what they call a "Jock Tax" to get their share of income tax from highly paid athletes and entertainers who perform inside the state. Their income for the year has to be prorated between the various states in which they performed and they have to file income tax returns for all of those that have income taxes. While many athletes and entertainers have established Florida as their official tax home, they are still keeping their tax preparers quite busy preparing tax returns for each of the states in which they earned income.

There are tricks that can be used to disguise where the income was actually earned. A good creative and aggressive tax advisor can help set those up.

KMK

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2003 08:51:00 PM Send this post: