other state loss recovery (vs. other state tax credit)

Apr 16, 2008 2 Replies

Is it possible to get a double benefit from a source "loss" from a non-resident state?



For income, it's clear that if you are a resident of state A and have source income from state B as a non-resident, you will be taxed by both states on the same income, usually with a credit of some kind from one of the states to offset the double taxation.



But suppose taxpayer is resident of state A for first part of year, with wage income. Upon moving to state B, the house in state A is converted to a rental and incurs a loss during the rest of the year (non-resident of state A).



For state A, can the source loss during the non-resident period be used to offset the income from the resident period on the part-year return for state A? For state B, it's clear the loss (and income) from any source while a resident is included on the part-year return for the period while a resident.



In other words, while there is a mechanism to eliminate double taxation of income, is there a similar mechanism to prevent double deduction of a loss?



In case it matters, A = New York and B = California.


-Mark Bole


Short answer: Yes.

On a part-year resident NY return, NY taxable income includes (a) all income, from all sources, during the period of residence, plus (b) income from NY sources during the period of nonresidence. "Income" in this sense means net -- it includes losses. So yes, the loss incurred on the NY rental property during the nonresident part of the year is from a NY source and is allowed (all else, e.g. passive limitations, being equal) to offset NY income.

The same is generally true in all states that impose comprehensive individual income taxes.

Katie in San Diego

P.S. NJ may be an exception--I think NJ still requires two returns of a part-year resident, a resident return for the resident part of the year and a nonresident return for the nonresident part. If that is still true (I'm not sure, I didn't look it up), the loss during the NR period would not offset the income from the resident period. NY used to be that way but changed to a single part-year resident return a few years ago. There may be one or two other states that still have the two-return system for a part-year resident.

Katie in San Diego

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