State taxes on out-of-state rentals

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: The state where a rental sits can tax its income, so an out-of-state landlord may need a nonresident return there. Your home state usually taxes all your income but gives a credit for tax paid to the other state. Partnerships may offer composite returns, and some states require withholding when a nonresident sells. Rules vary, so read each state revenue department guidance.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Your tenant pays the mortgage; the IRS pays for the roof (eventually, over 27.5 years). If the roof is in a different state from your couch, two state tax departments may each want to talk about it. The IRS does not referee that conversation; federal law mostly leaves state taxation to the states.

The general pattern across income-tax states: income from real property is sourced to the state where the property is located. Your resident state taxes your worldwide income. The resident state then usually allows a credit for income tax paid to the other state on the same income. This page explains the moving pieces and the common mistakes. It is a general framework, not a state-by-state rulebook; always check the specific state revenue department's instructions. For the planning side of picking a home state, see state income tax planning.

CPA Warning Label: Two states can both want a piece of the same duplex. The credit for taxes paid prevents most double tax, not all of it, and never the double paperwork.

Source-state filing

If your rental is in a state with an individual income tax, you will usually have a nonresident filing obligation there once your income sourced to that state exceeds the state's filing threshold. Common features:

• Rental income is sourced to the property's location. So is gain on the sale of the property.
• Filing thresholds differ. Some states require a return for any income sourced there; others use a gross income threshold or a threshold tied to the standard deduction. Check the nonresident instructions.
• Losses matter. A rental that shows a loss may still be worth reporting on a nonresident return because many states let you carry passive losses forward, mirroring the federal rules, and use them against the eventual gain when you sell.
• No-income-tax states (for example, ones listed in the no-income-tax states comparison) do not require an individual income tax return, though local property taxes, sales or lodging taxes for short-term rentals, and entity fees may still apply.
• Local income taxes. Some cities and counties impose their own income or business taxes on rental activity. Short-term rentals often owe local occupancy tax.

The nonresident return generally starts from your federal adjusted gross income, then calculates the portion from that state. Many states compute tax on total income and then multiply by the ratio of state-source income to total income, so a high-earning nonresident can pay a higher rate on a small rental than a resident with only that income would.

Credit for taxes paid

Your resident state taxes all of your income, including the out-of-state rental. To prevent double taxation, most resident states allow a credit for taxes paid to another state on income that is also taxed by the source state.

How the credit is typically limited:

• It cannot exceed the tax the other state actually charged on that income.
• It cannot exceed the resident state's tax on that same income, usually calculated as the resident tax times the ratio of the double-taxed income to total income.
• It applies only to income actually taxed by both. If the source state has no income tax, there is nothing to credit.

So the practical outcome is usually that you pay the higher of the two states' effective rates on that income. If the rental state's rate is lower, your home state collects the difference. If it is higher, you pay the higher rate and the excess is not refunded.

A few states have reciprocal agreements, but those typically cover wages, not rental income. Do not assume a reciprocity agreement shields rent.

Composite returns

When you own rentals through a partnership or LLC with other owners in multiple states, the entity may be able to file a composite return on behalf of nonresident owners. The entity reports the owners' combined share of state income and pays tax, usually at the state's top rate or a set rate. Participating owners then generally do not file individual nonresident returns in that state.

Pros: fewer returns, the sponsor handles the filing, and the cost of preparing many small nonresident returns goes away.

Cons: the composite rate may be higher than your own effective rate, losses may not carry forward to you individually, and you may still need your own resident credit calculation. Some states also require nonresident withholding by the entity on distributive shares, which works like estimated tax and is credited on your nonresident return if you file one.

Syndication investors encounter this constantly; see syndication K-1 taxes.

Withholding on sale

A number of states require withholding when a nonresident sells real property located in the state. The buyer, closing agent or escrow company typically withholds a percentage of the sales price (or of the gain, depending on the state) and remits it to the state. You then file a nonresident return for the year of sale, report the actual gain, and get a refund of any excess withholding or pay any shortfall.

Practical points:

• Exemptions and reduced withholding are often available if the property qualified as your principal residence, if the sale is part of a 1031 exchange, or if you show the actual gain is smaller. Many states require an exemption form at or before closing, not afterward.
• Withholding is not the tax. It is a prepayment. If you have a loss on the sale, you may get it all back, but only after filing.
• 1031 exchanges: some states have rules for exchanges where the replacement property is outside the state, such as requiring an annual information return so the state can tax the deferred gain when you eventually sell.

Federal withholding under FIRPTA applies only to foreign sellers, not to U.S. residents of other states. Check the state revenue department page for the current rate and forms before you list the property.

Example

Illustration: Fran lives in State H (5% flat income tax, for illustration) and owns a rental in State R (graduated rates with an effective 4% on her apportioned income, for illustration). Assumptions: Fran's federal AGI is $120,000, including $20,000 of net rental income from the State R property; both states start from federal AGI and ignore deductions for simplicity.

1. State R nonresident return: State R taxes only the $20,000 sourced there. Using its method, tax is 4% of $20,000 = $800.
2. State H resident return: State H taxes all $120,000 at 5% = $6,000.
3. Credit for taxes paid to State R: limited to the smaller of the State R tax ($800) or State H tax on that income (5% times $20,000 = $1,000). Credit = $800.
4. Net State H tax: $6,000 minus $800 = $5,200.

Total state tax: $800 + $5,200 = $6,000, the same as if all income were taxed only at home. If State R had a 6% effective rate, State R tax would be $1,200, the credit would be capped at $1,000, and total state tax would be $1,200 + $5,000 = $6,200. The extra $200 is the cost of owning in a higher-tax state.

Common mistakes

• Skipping the nonresident return in loss years, then discovering at sale that the state has no record of the carryforward.
• Claiming the resident credit for tax paid to a state that has no income tax, or for local taxes the resident state does not credit.
• Forgetting state estimated payments. A profitable rental can create a nonresident estimated tax requirement in the source state, separate from your home state.
• Assuming the state follows federal bonus depreciation. Several states decouple, so the state depreciation schedule and the eventual state gain can differ from federal.

The real-world version adds different deduction rules, passive loss carryforwards and possible local taxes. The structure stays the same: source state first, resident state second, credit to reconcile.