Passive Carryover Loss on Sale of Out of State Property

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Topic Author
Alana888
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Joined: Thu Apr 10, 2014 3:50 am

Passive Carryover Loss on Sale of Out of State Property

Post by Alana888 »

I have now determined that I have $132,000 of carry over loss for my rentals in Hawaii.
Thanks to everyone who helped with that. I am just about done with the return and have one more question before I file

Does that passive realestate carryover loss for my property in HI carryover loss flow to a deduction on my CA return (I live and have a business in CA) or HI state returns (or both)?

I pre paid $8321 HI state tax on the capital gains from the sale (they withheld it from escrow) but when I filled out the HI return in Turbo Tax it gave me credit for those carry over losses which would result in a refund of the $8321 I’ve paid HI because it cancels the Capital gains owed. If I file that return and they grant the refund I will pay $0 capital gains to HI

On the CA state return it also flowed both the Capital gains income and the deduction for the passive carry over loss for the Hawaii sale onto the CA return.
In the interview, it asks if I paid any taxes to HI.
If I say I paid CG tax of $8321 to Hawaii (and don't get the HI refund) then it calculates I owe $7000 less in CA taxes.

If I get a refund of the $8321 from HI and say I didn’t pay any HI taxes on the CA interview, then I pay $7000 more for CA taxes.

My concern is if I am charged CG in CA because I tell them I didn’t pay any CG tax to HI and then HI denies the refund because the carry over credits aren’t applicable in HI I will end up paying twice.

Does anyone know if the passive carryover loss should apply to my CA (ordinary income) or my HI income (which is where the loss occurred) and if the Capital gains should be paid to CA or HI.

I have spoken to several CPA's about this and have not yet found one who knows. Do any of you brilliant tax/real estate people know about this?

Thanks in advance
fabdog
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Location: Williamsburg VA

Re: Passive Carryover Loss on Sale of Out of State Property

Post by fabdog »

If the rental was a Hawaii business... then it flows to your Hawaii return.

There should be some way to take credit for paying the Hawaii taxes on your CA return... somewhere in the allocations... where you tell the software that income.activity is HI, not cA, so it backs it out of your federal totals for CA. And if CA insists on taxing, you should get credit for paying the HI tax

Mike
Topic Author
Alana888
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Re: Passive Carryover Loss on Sale of Out of State Property

Post by Alana888 »

Sorry if I wasn't clear.

If the carry over credit goes to Hawaii as you suggest, it would cancel out the Capital gains I paid in Hawaii and I will receive a refund for the CG I paid Hawaii.

In which case I would have to say I did not pay any tax in Hawaii (because I would be owed a refund of what I paid) on the CA form
If I say I didn't pay any tax in Hawaii then the CA form does not give any credit for taxes paid to Hawaii (because there weren't any) and they want me to pay CA tax on the Capital gains from the sale.

So either the credit for passive carryover losses flows to Hawaii canceling out the CG I owe in HI and resulting in a refund of the CG I paid in HI in which case I pay CG tax in CA because I have no tax payment in HI to deduct, or if the credit does not flow to Hawaii and I can't deduct it from the HI returns, then I will have paid the CG tax in Hawaii and the carryover credit flows to California and I will not have to pay CG tax in CA because I paid it in Hawaii . I am trying to figure out which is correct (or something else)
kaneohe
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Re: Passive Carryover Loss on Sale of Out of State Property

Post by kaneohe »

I would think the passive loss carryover would apply to all 3.......Fed, CA because you are resident, and HI because biz is there. I believe you said you had an overall loss including both CG and passive loss carryover. So no tax owed to HI or CA. If you had a gain and paid tax to CA and HI, you could reclaim part/all of the HI tax by filing CA Sch S
(other state tax credit).
Topic Author
Alana888
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Joined: Thu Apr 10, 2014 3:50 am

Re: Passive Carryover Loss on Sale of Out of State Property

Post by Alana888 »

I believe the carryover loss is deductible from ordinary income in the year of the sale up to the amount of Capital gains so the amount of the carryover loss and the capital gains are the same by definition I think.

It would be great if I could get credit for the carryover loss from both states but I am not sure that is correct though I am sure most people here know more than me and I would love to find out for sure that is the case.

If I say I paid $0 tax to Hawaii which would be the case if I apply the carryover loss on my HI return and receive a refund, then CA wants to charge me tax on the capital gains. The only way the CG tax gets deducted from my CA return is if I say I paid CG tax to Hawaii. If I am supposed to receive credit for both as you say I would have to find a workaround but first I want to make sure that I am entitled to both as I wasn't planning on that and TT doesn't think so either as far as I can tell.
kaneohe
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Re: Passive Carryover Loss on Sale of Out of State Property

Post by kaneohe »

What did you do in prior yrs? Did you not file info for the HI rental on both HI and CA returns?
Topic Author
Alana888
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Re: Passive Carryover Loss on Sale of Out of State Property

Post by Alana888 »

What did you do in prior yrs? Did you not file info for the HI rental on both HI and CA returns?
The Federal schedule E as well as the other federal returns get filed with the CA returns, but the rental income doesn't go on the CA 540 tax return. It only goes on the HI return
kaneohe
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Re: Passive Carryover Loss on Sale of Out of State Property

Post by kaneohe »

Alana888 wrote: Tue Feb 18, 2020 2:08 am
What did you do in prior yrs? Did you not file info for the HI rental on both HI and CA returns?
The Federal schedule E as well as the other federal returns get filed with the CA returns, but the rental income doesn't go on the CA 540 tax return. It only goes on the HI return
but the HI rental income is included in Fed AGI so it carries over to CA AGI and is included in CA income unless
you exclude it on Sch CA. If you didn't have net rental income but had a passive loss carryover, then there would be a net 0 income on the Fed return and likewise for CA. However filing the 8582 for Fed which tracked the passive loss carryover has its CA equivalent in form 3801 https://www.ftb.ca.gov/forms/2018/18_3801.pdf
so, in effect, it is reported on the CA return.
Flora
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Re: Passive Carryover Loss on Sale of Out of State Property

Post by Flora »

You report ALL of your income on your federal return and on your RESIDENT state tax return. It does not matter if the income was earned in- or generated from property owned in- another state or even another country. Again - you report ALL of your items of taxable income on your federal return AND on your resident state return. When I say 'report' that means included on a tax return.

Next, you ALSO report income (i.e. file a tax return) in any non-resident states where you earned income or generated income from property owned in that state.

Thus all of the activity from on out-of-state rental property is on BOTH your resident state return and on the non-resident state return.

Here is the important part: a taxpayer's resident state allows a credit for tax paid to another state on the same items of income that were reported to and taxed by both states. This avoids double taxation at the state level. Though, this is not always a dollar for dollar credit due to different rates and state laws.

However, in your case your passive activity loss carryovers in Hawaii wiped out any Hawaii tax on the Hawaii gain thus you have ZERO Hawaii tax liability and the Hawaii amount withheld will be refunded to you. This means you did NOT pay tax to another state so you do NOT get a credit on your California tax return.


Since the property was sold in 2019, any remaining passive activity loss carryovers are freed up and are taken in 2019 (on federal, resident state and non-resident state returns). The remaining PAL carryover amount could be different for CA and for Hawaii purposes if you had already taken some of the rental property losses on your resident state return in previous years.

The gain on sale is also reported on all 3 returns.
kaneohe
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Re: Passive Carryover Loss on Sale of Out of State Property

Post by kaneohe »

https://www.ftb.ca.gov/file/personal/in ... ental.html

"California return
Your rental income after expenses will be included in your adjusted gross income once you file your federal return.

Residents
Residents are taxed on all rental income regardless of where the property is located."
Topic Author
Alana888
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Joined: Thu Apr 10, 2014 3:50 am

Re: Passive Carryover Loss on Sale of Out of State Property

Post by Alana888 »

Here is the important part: a taxpayer's resident state allows a credit for tax paid to another state on the same items of income that were reported to and taxed by both states. This avoids double taxation at the state level. Though, this is not always a dollar for dollar credit due to different rates and state laws.

However, in your case your passive activity loss carryovers in Hawaii wiped out any Hawaii tax on the Hawaii gain thus you have ZERO Hawaii tax liability and the Hawaii amount withheld will be refunded to you. This means you did NOT pay tax to another state so you do NOT get a credit on your California tax return.
Yes this is exactly where I am. Thank you for understanding and responding.
If my passive carryover loss deductions are fully accepted in Hawaii I will receive a full refund of the Capital Gains tax Hawaii with held from escrow so (as you say), I will have $0 tax liability in Hawaii and therefore no CA credit for taxes paid to another state, so I will pay capital gains tax on the sale in CA.

If HI then for some reason did not accept the full carryover loss deduction and therefore did not issue me a full refund for the CG taxes I've paid them, I will have paid CG tax twice at the state level.
Hawaii is very strict about taxes with high late penalties and I am concerned they are not going to just allow me to not pay any CG taxes in HI and instead pay them to California . Maybe I am being too cautious but I wanted to double and triple check that these carry over losses are fully deductible in Hawaii and that I won't owe CG tax in Hawaii before I pay my CA taxes which will include the CG tax. Its about $8300 so I want to be sure I don't end up paying it both states.

I guess if Hawaii does not accept the loss and charges me CG gains I can file an amended CA return claiming the credit for taxes paid to another state and receive a refund from CA?

Thanks so much to everyone who responded. I am getting info here I have been unable to find anywhere else (and I have spend dozens of hours looking) I am so grateful for this resource and the people who take the time to learn all this and help others learn.
Last edited by Alana888 on Tue Feb 18, 2020 2:37 pm, edited 1 time in total.
kaneohe
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Re: Passive Carryover Loss on Sale of Out of State Property

Post by kaneohe »

You should be able to use your passive loss carryover in CA also so if large enough that should negate the CG tax.
Topic Author
Alana888
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Joined: Thu Apr 10, 2014 3:50 am

Re: Passive Carryover Loss on Sale of Out of State Property

Post by Alana888 »

You should be able to use your passive loss carryover in CA also so if large enough that should negate the CG tax.
Yes the carry over loss will negate part of the Capital Gains but I will pay for that when I sell the second property since I've used all its carryover loss now I wont have that to negate the recaptured depreciation for that property. Bit at least I understand a bit more how it works now (hopefully) so I can prepare for that

Its amazing how complex these tax rules are. I would have never attempted to do this my self i I had realized how complex it was, but the good thing about doing it myself (with the help of people here) is that I've learned so much and perhaps can help others who find them selves in this situation.
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