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Filing state tax returns for income from real estate crowdfunding

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  • Filing state tax returns for income from real estate crowdfunding

    So I've got 2 K-1s for 2020 from EquityMultiple on 2 of my crowdfunding investments. One investment is in Texas, wherein the K-1 reports $300 in guaranteed payments (line 4) of the K-1. The other is in Ohio, and reports a rental real estate loss of $42 on line 2 of the K-1. I live in Oregon. Do I need to file a TX and OH state income tax return for these 2 or do I just report these on my Oregon state tax return?

    Thanks for the input in advance!

  • #2
    Yes, you have to report the income in the state it was earned/received. Note this is for deals that invest your funds in specific properties. Does not apply to say REITs in which you own shares in the fund not the investments.

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    • #3
      Texas has no state income tax return. Don't bother with it. Nothing to file for Texas.

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      • #4
        Oh right, no state tax for Texas. But when I plug the numbers in Turbotax, the $300 in guaranteed payments appear to still get taxed by Oregon, even though the income source is in Texas. There doesn't seem to be any way for me to avoid getting this taxed in Oregon with Turbotax. If the income was earned in a state with income taxes, it would seem like I'm getting double-taxed at the state level. Does this make sense? Doesn't seem right to me.

        Thanks for the feedback guys.

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        • #5
          Originally posted by DrGuch View Post
          Oh right, no state tax for Texas. But when I plug the numbers in Turbotax, the $300 in guaranteed payments appear to still get taxed by Oregon, even though the income source is in Texas. There doesn't seem to be any way for me to avoid getting this taxed in Oregon with Turbotax. If the income was earned in a state with income taxes, it would seem like I'm getting double-taxed at the state level. Does this make sense? Doesn't seem right to me.

          Thanks for the feedback guys.
          Yes, now you also need an accountant. Welcome to the wonderful world of real estate investing.

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          • #6
            Originally posted by DrGuch View Post
            Oh right, no state tax for Texas. But when I plug the numbers in Turbotax, the $300 in guaranteed payments appear to still get taxed by Oregon, even though the income source is in Texas. There doesn't seem to be any way for me to avoid getting this taxed in Oregon with Turbotax. If the income was earned in a state with income taxes, it would seem like I'm getting double-taxed at the state level. Does this make sense? Doesn't seem right to me.

            Thanks for the feedback guys.
            You cannot avoid income tax in your state by leaving to work or investing in property in a non-tax state. The income will be appropriated to you in your home state. If you work in another state with income taxes, then the income will typically be taxed in the other state but, as I’ve said ad nauseam on this forum, every state has its own set of rules about tax-sharing. But they all agree on the rule about residents of a taxable state earning income in a non-tax state - you’re going to pay tax.
            Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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            • #7
              Thanks again to all the responders! This helps me quite a bit.

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              • #8
                One thing to add: You may also be subject to a city/county/metro/transit-district tax

                Some of them only care where you live.

                Some care where the income is sourced - such as a local business tax return where they may tax you only on the portion in that area. So keep those in mind. Sometimes it ends up being helpful to have these returns that establish nexus (tax presence) in other states as it may reduce your local business taxes...but I get into the weeds.

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                • #9
                  jfoxcpacfp
                  Moderator
                  jfoxcpacfp , would you even file an out of state return for these relatively low distribution amounts? The tax is going to be 0 or very small.

                  Also, if in this example, DrGuch paid taxes in OH, wouldn't he get credit in his home state of OR?
                  The tax code is flawed, but at least they don't double dip (I think), correct?

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                  • #10
                    Originally posted by HM7 View Post
                    jfoxcpacfp
                    Moderator
                    jfoxcpacfp , would you even file an out of state return for these relatively low distribution amounts? The tax is going to be 0 or very small.

                    Also, if in this example, DrGuch paid taxes in OH, wouldn't he get credit in his home state of OR?
                    The tax code is flawed, but at least they don't double dip (I think), correct?
                    Sadly, yes, we would. The penultimate result of filing an income tax return is the bottom line (balance due or refund to be received and what to do with it), but there are other reasons to file. For example, the Form 8606 generates no taxes (generally) but you file it in order to report and build a history of your basis. You also file returns to avoid generating a notice from a taxing authority that has received a report of activity in its state so as to avoid communication. Another reason may be to start the SOL (statute of limitations).

                    Regardless, one of the services clients pay us for is compliance and it is not our place to draw the line of demarcation on what should and shouldn’t be filed - the client can choose whether to report after we have finalized the return. Every state has different regulations and what may not matter in one may in another. Better to do our job and let the chips fall where they may.
                    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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