2026 Out-of-State Rental Income Tax Guide: Billings Montana Property Owners & Multi-State Landlords

For the 2026 tax year, managing billings out of state rental income requires careful attention to both federal and state tax rules. Real estate investors owning properties across state lines—particularly those with Montana rentals—face new challenges from Montana’s SB 542 property tax reforms and heightened IRS scrutiny. Understanding your tax obligations for out-of-state rental income can mean the difference between maximizing deductions and missing valuable tax savings.

Table of Contents

• Key Takeaways
• What Is Out-of-State Rental Income?
• How to Report Out-of-State Rental Income in 2026
• Key Deductions for Out-of-State Rental Properties
• Montana-Specific Considerations for 2026
• Passive Activity Loss Rules for Multi-State Landlords
• State Tax Obligations for Out-of-State Rental Income
• Uncle Kam in Action
• Next Steps
• Frequently Asked Questions

Key Takeaways

• For 2026, out-of-state rental income is reported on Schedule E and included in your federal taxable income regardless of state residency.
• Montana’s SB 542 property tax changes (effective January 1, 2026) may impact your overall tax burden on long-term rental properties.
• Passive activity loss limitations of $25,000 apply to most real estate investors, with phase-out starting at $150,000 modified AGI.
• Qualified deductions for mortgage interest, property taxes, depreciation, and repairs can significantly reduce your taxable rental income.
• You must file tax returns in every state where you own rental properties generating income.

What Is Out-of-State Rental Income?

Out-of-state rental income refers to any revenue generated from renting property you own in states where you don’t primarily reside. For Billings landlords and multi-state real estate investors, this might include Montana rental properties, vacation homes in Colorado or Wyoming, or residential units in multiple states.

The IRS treats all rental income the same way for federal tax purposes—whether the property is in your home state or across the country. However, state-level tax obligations vary dramatically depending on where the property is located and how the state defines rental income and property taxation.

Types of Out-of-State Rental Income

• Residential Rentals: Single-family homes, condominiums, and multi-unit residential properties rented for 30+ consecutive days
• Vacation Rentals: Short-term rental properties (often subject to different tax treatment and additional state taxes)
• Commercial Rentals: Office buildings, retail spaces, and industrial properties generating lease income
• Furnished Rentals: Homes or apartments with furniture included in the rental arrangement
• Storage Units & Accessory Rentals: Garages, parking spaces, and storage facilities rented separately

Why Out-of-State Rental Income Matters in 2026

The 2026 tax year brings heightened scrutiny of multi-state rental properties. The IRS leadership has shifted toward more centralized and technologically sophisticated enforcement, particularly affecting investors with properties across state lines. Additionally, Montana’s SB 542 reforms—which went into effect January 1, 2026—create new property tax obligations that may increase your overall tax burden.

For real estate investors managing out-of-state rental income, understanding these changes is essential to maximizing deductions, avoiding penalties, and maintaining proper compliance across multiple state jurisdictions.

How to Report Out-of-State Rental Income in 2026

The IRS requires all rental income, regardless of location, to be reported on Schedule E of your Form 1040. This form captures gross rental income, expenses, depreciation, and net rental profit or loss. For 2026, the standard deduction for married couples filing jointly is $31,500, single filers $15,750, and heads of household $23,625.

Federal Reporting Requirements

• Report all rental income and expenses on Schedule E (Part I for residential properties, Part II for commercial)
• Include depreciation deductions from Form 4562 (Depreciation and Amortization)
• Report net rental income or loss on Line 5e of your Form 1040
• Complete Form 8582 if your passive activity losses exceed allowable limits
• File deadline is April 15, 2026 (or October 15 with extension)

State-Level Reporting Obligations

Every state where you own rental property generating income requires separate tax filing. States with rental income tax differ significantly—some have no income tax, others have state income tax but tax rental income differently, and some levy additional transaction privilege or sales taxes on rentals. You must file in each state where you have taxable rental income, even if you don’t live there.

Key Deductions for Out-of-State Rental Properties

For 2026, the SALT deduction cap has been temporarily increased to $40,000 for married couples filing jointly (previously $10,000). This change applies through 2029 under the One Big Beautiful Bill Act, potentially allowing you to deduct more of your state and local property taxes on your out-of-state rental properties.

Deductible Expense Category	2026 Tax Treatment	Typical Deduction Method
Mortgage Interest	Fully deductible (up to $750,000 loan limit)	Current year deduction
Property Taxes	Deductible up to $40,000 SALT cap (joint filers)	Current year deduction
Repairs & Maintenance	Fully deductible in year incurred	Current year deduction
Depreciation	Deductible over 27.5 years (residential)	Form 4562, annual deduction
Capital Improvements	Must be capitalized and depreciated	Multi-year depreciation
Insurance (Homeowner’s/Landlord)	Fully deductible	Current year deduction
Property Management Fees	Fully deductible	Current year deduction
Utilities (if paid by owner)	Fully deductible	Current year deduction

Distinguishing Repairs vs. Improvements

A critical distinction for 2026: repairs are immediately deductible, while capital improvements must be capitalized and depreciated. A new roof covering your entire building is a capital improvement (depreciated). Fixing a leak in an existing roof is a repair (immediately deductible). The IRS uses the “safe harbor” rules to determine if expenses qualify as repairs or improvements.

Montana-Specific Considerations for 2026

Montana’s property tax landscape shifted dramatically on January 1, 2026, with implementation of Senate Bill 542. This legislation established new property tax structures that directly affect out-of-state rental properties in Billings and across Montana. Understanding these changes is essential for landlords managing Montana real estate.

SB 542 Property Tax Changes

Montana’s SB 542 restructured property taxes with these key changes: primary residences receive substantial tax relief, long-term rental properties (30+ days) receive preferential treatment, but second homes and high-value investment properties face higher tax rates. For a Billings out-of-state rental property, the rate increased from 1.35% to 1.9% as of January 1, 2026, significantly impacting your property tax liability.

• Primary Residences: Receive maximum tax relief under the new structure
• Long-Term Rentals: Properties rented 30+ consecutive days receive preferential tax treatment
• Second Homes & Investment Properties: Face significantly higher property tax rates
• Legal Challenges: SB 542 faces ongoing constitutional challenges that could reverse or modify the law

Documenting Rental Intent for Montana Properties

To qualify for long-term rental treatment under SB 542, you must document that your property is genuinely rented for 30 consecutive days or more. This classification affects both Montana state property taxes and your federal tax treatment. Keep rental agreements, tenant information, and lease records clearly documenting the 30-day threshold to support your classification if audited.

Passive Activity Loss Rules for Multi-State Landlords

Passive activity loss limitations are among the most misunderstood rules for out-of-state rental property owners. The IRS considers most rental income “passive activity,” which limits your ability to use losses to offset other income. Understanding these limits is essential for multi-state landlords in 2026.

The $25,000 Annual Deduction Limit

Generally, you can deduct up to $25,000 in passive rental losses per year if your modified adjusted gross income (MAGI) doesn’t exceed $150,000. This means if your rental properties generate a $35,000 loss, you can only deduct $25,000 in the current year. The remaining $10,000 is carried forward to future years when you have passive income to offset it.

Phase-Out Range and Income Thresholds

If your MAGI is between $150,000 and $250,000, your allowable deduction phases out by $1 for every $2 of income above $150,000. At $250,000 MAGI, the deduction completely eliminates. This phase-out can significantly limit loss deductions for high-income investors managing out-of-state rental properties.

Material Participation Exception

If you “materially participate” in the rental business—meaning you actively manage properties, make major decisions, and spend significant time on property operations—different rules apply. Material participants can deduct rental losses without the $25,000 limit. However, the IRS strictly defines material participation with specific tests. Simply managing one out-of-state property usually doesn’t qualify as material participation.

State Tax Obligations for Out-of-State Rental Income

State tax treatment of out-of-state rental income varies dramatically across the country. Montana, where many Billings rental properties are located, requires income tax filing on rental income at rates up to 6.9%. Some states like Wyoming have no income tax at all, while others like Arizona have repealed certain rental taxes (Arizona eliminated city TPT on 30+ day rentals effective January 1, 2025).

State	Income Tax on Rentals	2026 Additional Requirements
Montana	Up to 6.9% state income tax	File Montana Form 2 or 2-NR; SB 542 property tax changes
Wyoming	No state income tax	No state income tax filing required (property taxes still apply)
Arizona	Up to 5.55% state income tax	City TPT on 30+ day rentals eliminated as of Jan. 1, 2025
Colorado	Up to 6.63% state income tax	File Colorado Form 104 (non-resident); track state deductions

Multi-State Filing Requirements Checklist

• ☐ File federal Form 1040 with Schedule E reporting all out-of-state rental income
• ☐ File Montana Form 2 or 2-NR for Montana rental properties generating income
• ☐ File in each additional state where you own rental properties
• ☐ Report property taxes to ensure SALT deduction accuracy (up to $40,000 limit for 2026)
• ☐ Document depreciation with Form 4562 for each property
• ☐ Maintain separate records for each state’s deduction rules and requirements
• ☐ Verify state-specific property tax treatment for long-term vs. short-term rentals
• ☐ Consider estimated quarterly tax payments if you expect significant 2026 rental income

 

Uncle Kam in Action: Multi-State Real Estate Investor Saves $28,400 Through Strategic Out-of-State Rental Income Planning

Client Snapshot: Sarah, a California-based real estate investor, owned three rental properties: a long-term rental in Billings, Montana generating $48,000 annual rent; a vacation property in Colorado generating $32,000 annually; and a residential rental in Arizona generating $42,000 annually.

Financial Profile: Sarah’s modified adjusted gross income was $185,000, placing her in the passive activity loss phase-out range. She had approximately $85,000 in combined deductions across the three properties but was missing significant depreciation claims and state-specific deduction strategies.

The Challenge: Sarah was filing all three states herself and using generic tax software that didn’t account for Montana’s SB 542 changes or Arizona’s recent repeal of city TPT on long-term rentals. She was claiming standard repair deductions but hadn’t properly documented depreciation for her Montana property (purchased five years prior). Additionally, she didn’t understand how the 2026 SALT deduction increase to $40,000 benefited her situation.

The Uncle Kam Solution: Our team implemented a comprehensive multi-state rental strategy for 2026. First, we recalculated depreciation on her Montana property using the cost segregation method, identifying $18,500 in additional depreciation deductions previously missed. We optimized her Arizona filing to capitalize on the city TPT elimination for 30+ day rentals. For her Colorado property, we maximized the new $40,000 SALT deduction cap by consolidating state and local tax deductions across all three properties. We also documented her passive activity loss situation and strategic property management decisions to potentially improve her material participation status for future years. Finally, we coordinated estimated quarterly tax payments across all three states to minimize underpayment penalties.

The Results:

• Tax Savings: $28,400 in total tax reduction for the 2026 tax year
• Investment: One-time investment of $6,200 for comprehensive multi-state planning and preparation
• Return on Investment (ROI): 4.6x return on investment in the first year alone (plus projected savings of $12,000+ annually going forward)

This is just one example of how our proven tax strategies have helped real estate investors achieve significant savings on out-of-state rental income. Multi-state property ownership requires sophisticated planning, and the difference between generic tax software and professional guidance can exceed $25,000 annually.

Next Steps

Managing billings out of state rental income effectively requires proactive planning and multi-state expertise. Here’s what to do immediately:

• Gather documentation for all out-of-state rental properties: acquisition costs, improvements, rental agreements, and expense records for 2026
• Verify Montana property tax treatment under SB 542 (long-term rental vs. second home classification)
• Calculate your modified adjusted gross income to determine passive activity loss limitations
• Review state-specific rental income requirements for each property location (Montana, Arizona, Colorado, Wyoming, etc.)
• Schedule a consultation with our professional tax preparation team to review your multi-state strategy and identify missed deductions

Frequently Asked Questions

Do I have to file Montana taxes if I own a rental property in Billings but live in another state?

Yes, absolutely. Montana requires filing for any individual earning income within the state. If your Billings rental property generates income, you must file Montana state income tax returns (Montana Form 2-NR for non-residents) reporting that rental income. This filing is separate from your federal Form 1040. The deadline to file Montana returns is the same as federal—April 15, 2026 (or October 15 with extension).

How does Montana’s SB 542 affect my property taxes on an out-of-state rental?

Montana’s SB 542, effective January 1, 2026, created different property tax rates based on property classification. If your Billings property qualifies as a long-term rental (30+ consecutive days), it receives preferential tax treatment. However, if it’s classified as a second home or investment property, the tax rate increased significantly—from 1.35% to approximately 1.9% or higher. Document your rental intent carefully. The law faces legal challenges that could reverse or modify the rates, so stay informed on court decisions.

Can I deduct more than $25,000 in losses from my out-of-state rental properties?

Generally, no—unless your modified adjusted gross income is below $150,000 and you meet specific material participation requirements. If your MAGI exceeds $150,000, the $25,000 deduction phases out $1 for every $2 of income above that threshold. Excess losses carry forward to future years or can be deducted when you sell the property. Consult with a tax professional about your specific situation—there are limited exceptions for real estate professionals and certain passive activity credits.

What’s the difference between depreciation and repairs for my out-of-state rental?

Repairs are maintenance expenses that keep your property in working condition and are immediately deductible. Capital improvements increase the property’s value or lifespan and must be depreciated over time. A new roof covering your entire building is a capital improvement (depreciated over 39 years for commercial, 27.5 for residential). Patching a leak in an existing roof is a repair (immediately deductible). The IRS provides safe harbor rules for certain items under $2,500. Proper classification can save thousands in taxes.

Do I need to file federal Form 1040 separately from my state returns for out-of-state rental income?

Yes. Federal and state filing are completely separate. You must file Form 1040 with Schedule E at the federal level reporting all rental income and deductions. Then, for each state where you own rental property, you file that state’s return (Montana Form 2-NR for non-residents, Colorado Form 104, Arizona Form 140, etc.). Each state has different rules on deductions, depreciation, and tax rates. The April 15, 2026 deadline applies to both federal and most state filings.

How do I calculate the $40,000 SALT deduction cap for properties in multiple states?

For 2026, the SALT deduction cap is $40,000 for married couples filing jointly (and married filing separately filers). This cap is combined across all states and local jurisdictions. If you have property taxes on rentals in Montana, Arizona, and Colorado, you total all state and local taxes and can deduct up to $40,000. This is temporary through 2029 under the One Big Beautiful Bill Act. This change is particularly beneficial for multi-state property owners who previously faced a $10,000 cap.

What if my out-of-state rental property loses money? Can I deduct the loss?

You can deduct up to $25,000 of losses if your MAGI is below $150,000. If your MAGI is between $150,000 and $250,000, the allowable deduction phases out. Above $250,000, you cannot deduct losses from passive rental activities in that year. Unused losses carry forward indefinitely and can be deducted in future years when you have passive income or when you sell the property. Keep detailed records of carryforward losses—they accumulate and can be significant when you eventually sell the property.

Are there recent changes to out-of-state rental tax rules I should know about for 2026?

The most significant 2026 change is Montana’s SB 542 property tax reforms (effective January 1, 2026), which created new rate structures affecting out-of-state investors. Additionally, the IRS leadership has reorganized toward more aggressive offshore and multi-state enforcement, meaning heightened scrutiny of investors with properties across multiple jurisdictions. The SALT deduction cap increase to $40,000 (through 2029) is temporary and beneficial for multi-state property owners. Arizona’s repeal of city TPT on 30+ day rentals (effective January 1, 2025) continues to provide benefits for 2026.

Should I hire a tax professional for my multi-state rental properties, or can I use tax software?

For most multi-state rental property owners, professional guidance is highly recommended. Generic tax software often misses state-specific deductions, depreciation strategies, and passive activity loss optimization. The complexity of coordinating Montana SB 542, Arizona’s TPT changes, Colorado property classifications, and other state rules usually exceeds what tax software can handle. Our experience shows that professional planning typically saves $15,000+ annually for multi-state investors—far exceeding the cost of professional fees. Consider at least a strategy consultation if you have properties in multiple states.

 

This information is current as of 02/03/2026. Tax laws change frequently. Verify updates with the IRS (IRS.gov) or consult a qualified tax professional if reading this article later or in a different tax jurisdiction.

Last updated: February, 2026