Disposition of property in state in which I am a non-resident

I don't see any loss on your disposition of your PA property. PA does not conform to US passive activity rules. Assuming this is property acquired after 6/1/71, your adjusted cost basis is what you paid for the property plus capital improvements minus your allowed or allowable depreciation. You report the sale on PA Schedule D.

I sold the property in 2014. I had a gain of $5K (after adjusting the cost basis due to rental depreciation) but a passive activity loss of $45K (accrued over 4 years). This year I was able to deduct the $40K loss from both federal and CA state tax forms to get a fairly large refund.

I would like to know how I should go about reporting this sale of property on the PA 40 tax form as a final non-resident return. Since I don't have any other income in PA, i would just be report a $40K loss and that['s] it? ========== Note that I do not practice in Pennsylvania.

You should explore the possibility that you may have a net operating loss under state law which could carry back into your other non-resident years. State level NOLs generally follow different rules than federal NOLs and usually have different amounts, if allowed at all.

Note that since your question was about PA tax only, I assume you did not have a federal or CA NOL also. For NOL purposes, rental activities generally count as if they were business activities.

In the case at hand, it would not be allowed. Pennsylvania law allows only corporate taxpayers to deduct NOLs.