By Roger Ledbetter, CPA. Updated July 2026.

Key takeaways

• Your federal K-1 is not your state K-1. Most large states add back bonus depreciation, which turns a federal paper loss into state taxable income in year one.

• New York City taxes S-corp income at 8.85% as if the S election never happened, and taxes partnerships at 4% under the UBT. Rentals held for your own account escape the UBT. Operating businesses do not.

• The state where your property sits taxes the rent and the sale no matter where you live, and several states take their cut at the closing table.

• Pass-through entity tax elections are worth five figures in federal deductions for most owners, and they run on deadlines that pass before most people think about taxes at all.

A Houston owner with an operating company, three rental LLCs, and an LP position in a Georgia deal has one federal return and, easily, four state stories to keep straight. Each state starts with the federal numbers and then rewrites them. The rewrites are where multi-state owners overpay, underfile, or both. This guide walks the four big divergence points and what each one costs.

Why is my state income higher than my federal?

Because most big states refuse to follow federal bonus depreciation. The 2025 tax law made 100% bonus depreciation permanent for federal purposes. The states never agreed to pay for it. More than thirty states decouple, each with its own repair mechanism, and the difference lands directly on your state K-1.

Here is what the table means in dollars. Say a cost segregation study on your building produces a $500,000 federal bonus deduction in year one, and you are a New York filer. Federal return: $500,000 deduction now. New York: add the $500,000 back, deduct only the depreciation you would have had without bonus, maybe $18,000, and recover the rest year by year over the asset lives. Your federal K-1 shows a loss. Your New York return shows income. Both are correct.

The lasting cost is bookkeeping. Every decoupled state carries its own basis in every asset, which means the state gain when you sell is different from the federal gain, for the entire life of the deal. An owner with property in three decoupled states is running four depreciation schedules. Miss that, and the exit-year returns are wrong in every state at once.

What happens to your S-corp in New York City?

New York City does not recognize the S election. The election that eliminates entity-level tax everywhere else simply does not exist for city purposes. An S-corp doing business in the city pays the General Corporation Tax at 8.85% of its NYC-allocated income, at the entity level, with no offsetting credit for the shareholder. Partnerships, LLCs, and sole proprietorships doing business in the city pay the Unincorporated Business Tax at 4% instead.

There is one carve-out that matters enormously for real estate: owners holding, leasing, or managing property for their own account are exempt from the UBT. That is why New York City rental real estate sits in LLCs and partnerships, and almost never in S-corps. The LLC holding your own rentals owes no UBT. The same building inside an S-corp is exposed to the GCT.

Who walks into this? The out-of-state owner. Say your S-corp earns $400,000 and you move to Manhattan, or you open a desk there, or you start serving city clients from a city location. The income allocated to the city picks up an 8.85% entity-level tax, roughly $35,000 a year on full allocation, that no S election protects you from and no shareholder credit refunds. The structure that was optimal in Texas is a tax generator in the five boroughs. This is a design question to answer before the move, not after the first city filing notice.

When does selling into another state create a filing obligation?

Sooner than most owners think, and without anyone setting foot there. The old rule sourced service revenue to where you did the work. The majority rule now is market-based sourcing: the customer’s state claims the revenue. Pair that with economic nexus thresholds and a Texas firm can owe filings in states it has never visited.

California is the clean example. Sell more than roughly $757,000 into California (the 2025 figure, indexed each year) in a year and you are “doing business” there: the entity files, an LLC owes at least the $800 minimum, and the owners pick up nonresident filing obligations. Your distributive share of a partnership’s California sales counts toward your own threshold. Federal protection under P.L. 86-272 covers only sellers of tangible goods, and the big states now read even that protection narrowly. Services, rentals, and K-1 income get no shelter.

What happens when you sell property in another state?

The property state taxes the gain, wherever you live, and several states collect at the closing table so nonresidents cannot quietly skip the filing.

Two structural notes for syndication investors. First, composite returns: most states let the partnership file one return covering all nonresident LPs. Convenient, but composites run at the state’s top rate with no deductions, so passive LPs with losses elsewhere often overpay through them. Ask what you are joining before you sign the consent. Second, the California 1031 clawback: exchange out of a California property into a Texas property and California does not forget. You file Form 3840 every single year until the deferred gain is recognized, and when the replacement property finally sells, California collects tax on the gain that accrued back home. Skip the 3840 and the Franchise Tax Board is authorized to estimate and assess. That form is the cheapest insurance in the multi-state real estate world.

Is the PTET election still worth it in 2026?

For most profitable owners, yes, and more than ever for high earners. The 2025 tax law raised the federal SALT deduction cap to $40,000 for 2025, indexed after that, but phases it back down above $500,000 of income to a $10,000 floor. High-income owners are right back where they started. The pass-through entity tax workaround survived the law intact: the entity elects to pay state tax at the entity level, deducts it in full against federal income, and the owners claim state credits.

The math is simple and large. A $1,000,000 profit run through a 9% PTET state produces a $90,000 entity-level state payment that is fully federally deductible, worth roughly $33,000 of federal tax at the top rate, against a personal SALT deduction that may be capped at $10,000.

The catch is the calendar. New York’s election for a tax year is due March 15 of that same year, made online, no extensions, and a missed click costs the full year. California requires a June 15 prepayment of the greater of half the prior-year PTET or $1,000; starting in 2026 a shortfall no longer kills the election but takes a 12.5% haircut out of the credit. Most states only accept the election on a timely filed original return. Roughly three dozen states plus New York City now offer a PTET, each with its own trap. Multi-state owners need these dates on a calendar that someone actually owns.

What about Texas?

No personal income tax, which is why the rest of this guide keeps comparing everything to home. The franchise tax still applies to your entities, and two of its rules surprise multi-LLC owners.

First, the no-tax-due threshold, $2.65 million of annualized revenue for 2026 reports, applies to your combined group, not to each LLC. Entities under common ownership operating as a unitary business file combined, and their revenue aggregates. Splitting one business across four LLCs does not multiply the threshold by four.

Second, the passive-entity escape hatch is narrower than its name. Rental income is not passive for the franchise-tax test, so the LP holding your rentals generally does not qualify as a passive entity, even though the same income is passive for federal purposes. Different statute, different definition, different answer.

Below the threshold there is no tax, but there is still a filing: the Public Information Report, due May 15, every year, per entity. Miss it long enough and the state forfeits the entity’s right to do business, which surfaces at the worst possible moment, usually a closing.

What goes wrong

The pattern is the same as everywhere else in tax: the damage is created early, quietly, and discovered late, loudly. Every item on that list is preventable with a calendar and a schedule.

How we handle multi-state owners

The work is discipline, applied on a schedule. One depreciation and basis schedule per state that decouples. A PTET calendar with the March and June dates owned by a person, not a hope. A withholding review before every out-of-state closing, so the right form is at the table. A nexus review once a year as sales, employees, and K-1s move. A boutique firm handles all of it, provided somebody is actually looking.

FAQ

Why is my state K-1 bigger than my federal K-1? Usually bonus depreciation. Most large states add back some or all of the federal bonus deduction and let you recover it over later years, so year-one state income runs higher than federal, especially after a cost segregation study.

Does my LLC owe California tax if I only have customers there? It can. California sources service revenue to the customer and treats roughly $757,000 of annual California sales (indexed each year) as doing business in the state, which brings entity filings, the $800 LLC minimum, and nonresident owner returns.

Do I pay tax twice on an out-of-state rental? Generally no. The property state taxes the income, and your home state either has no income tax, like Texas, or grants a credit for taxes paid to the other state. The cost of multi-state ownership is filings and rate differences, not true double tax, with exceptions like the NYC entity-level taxes.

What is a composite return, and should I join it? One return the partnership files covering all nonresident owners, at the state’s top rate with no deductions. Convenient for small allocations, expensive for large ones. Compare it against filing your own nonresident return before consenting.

Does New York City really tax S-corps? Yes. The city does not recognize the S election and taxes city-allocated S-corp income at 8.85% under the General Corporation Tax, at the entity level. Partnerships and sole proprietors pay the 4% UBT instead, with an exemption for rentals held for your own account.

When is the New York PTET election due? March 15 of the year it covers, filed online. Miss it and the election, and the federal deduction it carries, waits until next year.

Does Texas tax my rental income? There is no personal income tax on it. The entity holding the rentals is generally subject to the franchise tax regime, files combined with your other entities if ownership is common, and files a PIR every May regardless of size.

What records do I need for state depreciation differences? A per-asset schedule for every decoupled state: the state addback, the state recovery, and the resulting state basis. It is the only way the exit-year gain comes out right in each state.

About Baldridge Ledbetter

Baldridge Ledbetter is a CPA firm in Houston that serves real estate syndicators, LLC owners, and profitable business owners. Our work covers real estate tax, entity structure across multiple LLCs, and small business tax planning for pass-through owners. We think like business owners because we are business owners. If your current CPA only shows up at tax time, reach out at [/contact].