Why Syndication Investors File Nonresident State Tax Returns
You may have to file a state tax return for a syndication because most states that have an income tax also tax nonresidents on income from real property located there. When the deal's apartment building sits in a state you do not live in, your share of its income is generally that state's "source income," so the state can expect a nonresident return from you, even though your home state also taxes you. Whether you must actually file depends on that state's filing rules, whether the deal files a group return for you, and whether the year produced income or a loss.
This post explains why the filing exists, what the state pages in your K-1 package mean, and how withholding, group returns and pass-through entity tax elections work, using New York as the example. Every state differs, and rules are as of October 2026. It builds on taxes for syndication investors and the K-1 guide.
Why do I owe tax to a state I do not live in?
States tax two groups of people: residents, on all of their income, and nonresidents, on income that comes from sources inside the state. New York's tax department states it plainly: a nonresident pays tax only on New York source income, "which includes earnings from work performed in New York State, and income from real property located in the state." Other states with an income tax generally follow the same idea.
A syndication is usually an LLC taxed as a partnership. Its income, losses and deductions flow to each investor on a Schedule K-1. If you own 2% of an LLC that owns a building in another state, 2% of that building's taxable result is yours to report there. See the IRS partner instructions for Schedule K-1.
Do I have to file if the deal showed a tax loss?
Often a syndication shows a tax loss in its early years because of depreciation, especially after a cost segregation study. Each state sets its own filing rule for nonresidents, and in some states a loss year does not require a return.
Some investors file anyway in loss years. A nonresident return can record a loss that you may be able to use against that state's income in a later year, such as the year the building sells. Whether a state lets you carry it forward, and whether filing is worth the preparation cost, is a question for your CPA. Do not assume you can skip every year just because the first one was a loss.
What do the state pages in my K-1 package mean?
The federal K-1 shows your total share. For states, the deal's preparer usually adds a state K-1 or a schedule for each state where it has income. Here is how to read the common lines:
| What you see | What it means | What you usually do |
|---|---|---|
| Your share of income or loss sourced to a state | The part of your K-1 that state can tax | Report it on that state's nonresident return if you meet its filing rules |
| Tax withheld or estimated tax paid for you | The deal already paid some of your tax to that state | Claim it as a payment on that state's return |
| Included in a group (composite) return | The deal filed one return for several nonresident investors | You may not need your own return there. Confirm you were included |
| PTET credit | The deal paid tax at the entity level under an election | Claim the credit on your return for that state, if eligible |
| No state schedule at all | The building is in a state with no income tax, or the preparer left it out | Ask the sponsor which it is |
How do withholding and composite returns work?
States worry that nonresidents will not file, so many make the deal collect the tax. New York is a useful example:
- Estimated tax for nonresident partners. New York Tax Law section 658(c)(4) requires partnerships with New York source income to make estimated tax payments on behalf of partners who are nonresident individuals, unless the partner files Form IT-2658-E certifying that they will meet the estimated tax and filing rules themselves. See the Form IT-2658 instructions.
- Group return. A partnership with New York source income and 11 or more qualified nonresident partners who elect it, with the same accounting period, can ask for approval to file Form IT-203-GR, one group return for them. A partner who is included is not required to file their own New York personal income tax return for that year. Approval must come first, and the group must keep at least 11 electing partners. See the Form IT-203-GR instructions.
A group return is convenient, but it may not let you use your own deductions or losses the way an individual return would.
What is a PTET election, and does it help me?
A pass-through entity tax lets the deal pay state income tax at the entity level instead of each investor paying on their own return. In New York, PTET is optional: an eligible partnership may elect it each year, between January 1 and March 15, and partners subject to New York personal income tax may then be eligible for a PTET credit on their New York return. See New York's PTET page.
Why would a deal elect it? In Notice 2020-75, the IRS said it intends to issue rules under which these entity-level income tax payments are deductible by the partnership in computing its federal taxable income. For some investors that can lower federal tax compared with paying the state tax personally. Whether it helps you depends on your income, your home state's treatment of the credit, and the federal limit on state and local tax deductions that applies to you. Treat it as a question for your CPA, not as an automatic benefit.
Will my home state tax the same income again?
Usually your home state taxes all of your income, including the deal's, and then gives a credit for tax you paid to the state where the building sits. New York, for example, gives its residents a nonrefundable credit for tax paid to another state on income sourced there, allowable only for the portion of the tax that applies to income sourced to and taxed by the other state. See New York's nonresident and resident filing page. The credit rules and limits differ by state, so you may still owe some tax in both.
If the building is in a state with no individual income tax, there is usually nothing to file there, but your home state still taxes your share. These lists change. Washington's Department of Revenue says the state does not currently have an individual income tax, and also that a new 9.9% income tax on individuals and joint filers with annual adjusted gross income above $1 million begins January 1, 2028. See the Washington income tax page. Check the current law for the year you file.
A made-up example
This example uses made-up numbers to show the mechanics. It is not a forecast and does not reflect any real deal or any state's actual rates.
You live in State A, which has an income tax. You own 2% of an LLC whose building is in State B, which also taxes income. In year 3 the LLC has $300,000 of taxable income, all sourced to State B.
| Step | Amount |
|---|---|
| LLC's taxable income sourced to State B | $300,000 |
| Your share (2%) | $6,000 |
| Tax the LLC paid to State B for you, at an assumed 5% rate | $300 |
| You report on State B's nonresident return | $6,000 of income, $300 already paid |
| You report on State A's resident return | $6,000 as part of all your income |
| State A credit for tax paid to State B | Up to $300, subject to State A's limit |
If State B's actual tax on your $6,000 is lower than $300, filing may get the difference back. If it is higher, you pay the balance.
What should I ask before I invest?
- Which states will the deal have income in, and will each get a state schedule?
- Will the deal withhold for nonresidents, file a group return or make PTET elections?
- When will the K-1 and state schedules arrive? See K-1 timing.
If you invest through an LLC or trust, the filing may land on that entity instead of you. See investing through an LLC or trust.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5+ units from their friends and followers under Rule 506(b) or 506(c). It prepares the standard offering documents, files Form D and state notices, forms the LLC and verifies accredited investors for 506(c) deals. Escrow is at Enterprise Bank & Trust, an FDIC-insured bank, investors fund by wire, and distributions are quarterly by default. DoorRaise does not prepare tax returns and gives no tax advice. The deal's accountant prepares the K-1 and state schedules. See how it works.
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FAQ
Do I file a state return for every state where the deal owns property?
Generally you look at each state where the deal has income sourced to it and check that state's filing rules for nonresidents. A single apartment deal usually means one other state at most. A fund with buildings in several states can mean several.
The deal withheld state tax for me. Do I still need to file?
Sometimes not, if you were included in an approved group return. Otherwise withholding is a payment toward your tax, not a return, and filing is how you settle the exact amount and claim any refund.
Does a PTET election mean I owe nothing to that state?
Not necessarily. It moves the payment to the deal's level, and you may then claim a credit. You may still have to file. Your CPA can tell you what the state requires.
Next step: read what the capital account on your K-1 means so you can check the rest of the package.
Sources
- IRS: Partner's Instructions for Schedule K-1 (Form 1065)
- IRS Notice 2020-75: entity-level state income tax payments
- New York State: Pass-through entity tax (PTET)
- New York State: Nonresident and part-year resident filing
- New York State: Instructions for Form IT-203-GR, Group Return for Nonresident Partners
- New York State: Instructions for Form IT-2658, Estimated Tax for Nonresident Partners
- Washington Department of Revenue: Income tax
This article is general information, not legal, tax or investment advice. Talk to a tax professional about your situation. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.