: Definition of gross income (Arizona state tax filing requirements) I am a non-resident with some commercial real estate income in Arizona, and I'm trying to figure out if I need to file there. It says that you have to file

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Many states have a simple method for assessing income tax on nonresidents.
If you have $X income in State A where you claim nonresident status and
$Y income overall, then you owe State A a fraction (X/Y) of the income
tax that would have been due on $Y income had you been a resident of State A.
In other words, compute the state income tax on $Y as per State A rules, and
send us (X/Y) of that amount. If you are a resident of State B, then State B
will tax you on $Y but give you some credit for taxes paid to State A.

Thus, you might be required to file a State A income tax return regardless
of how small $X is. As a practical matter, many commercial real-estate
investments are set up as limited partnerships in which most of the
annual taxable income is a small amount of portfolio income (usually interest
income that you report on Schedule B of Form 1040), and the annual
bottom line is lots of passive losses which the limited partners report
(but do not get to deduct) on the Federal return. As a result, State A
is unlikely to come after you for the tax on, say, 0 of interest income
each year because it will cost them more to go after you than they will
recover from you. But, when the real estate
is sold, there will (hopefully) be a big capital gain, most of which
will be sheltered from Federal tax since the passive losses finally get
to be deducted. At this point, State A is not only owed a lot of money
(it knows nothing of your passive losses etc) but, after it processes
the income tax return that you filed for that year, it will likely demand
that you file income tax returns for previous years as well.

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I would suggest reading through page 1 of the Arizona Nonresident form instructions at the web address below:
www.azdor.gov/Portals/0/ADOR-forms/TY2015/10100/10177_inst.pdf
To quote: "You are subject to Arizona income tax on all income derived from Arizona sources. If you are in this state for a temporary or transitory purpose or did not live in Arizona but received income from sources within Arizona during 2015, you are subject to Arizona tax. Income from Arizona sources includes the following:

...the sale of Arizona real estate..."

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Disclaimer: I am not a tax professional. Please don't rely on this answer in lieu of professional advice.

If your sole source of Arizona income is your commercial property, use the number on line 17 of your federal form 1040. This number is derived from your federal Schedule E. If you have multiple properties (or other business income from S corporations or LLCs), use only the Schedule E amount pertaining to the AZ property.