Virginia Out-of-State Tax Credit help

[ode923]

This one is driving me crazy. New client lives in Arizona, but is a limited partner of a Virginia partnership that owns and rents properties in Virginia. So the partnership distributes the net rental income to the partners/owners.

Virginia will give you a credit if you paid income tax in Arizona on that same income, but only if that income is "qualifying" income. What is qualifying income? According to Virginia, that's earned income, business income, and capital gains.

In previous years, the client's (now retired) tax professional always claimed this credit in Virginia. But I don't consider rents from a partnership to be "earned income", "business income", or capital gains. "Earned income" usually means wages or business income. And "business income" usually means income from your trade or business. A passive, minority, limited partner who receives real estate distributions from a partnership hardly seems to fit the bill. Am I correct in my thinking?

Before I tell my client to pay Virginia tax for the first time ever, I want to make sure I'm not royally goofing up here.

What is driving me crazy are:
1. For the past several years, the former tax professional always claimed this credit. Incorrectly?!
2. The partnership's K-1 allocates all of the client's income as being QBI income. So maybe it is "business income" after all?
3. Virginia partnerships normally must withhold taxes for their non-resident partners. This partnership says it doesn't do that for my client because he's "exempt" from that requirement. And the reason he's "exempt", they say, is because he doesn't have any Virginia income tax liability. But the only reason he doesn't have Virginia income tax liability is because he's always been (incorrectly) taking this out-of-state tax credit!

If anyone is more familiar with this, please chime in.........thank you!

[Margaret CPA in OH]

Just, Wow!  My issues pale in comparison.

[Christian]

Why is a resident of Arizona paying any Virginia income tax ? He is not a resident of Virginia. I hold one or two partnerships. I pay Virginia income tax but no other state income taxes. 

[Christian]

Additionally, the partnership knowing he lives out of state regards him as exempt because he has no Virginia residence. Gail may disagree but personally I don't see why he began paying Virginia tax.

[Gail in Virginia]

I would have expected the partnership to pay VA tax on his behalf.  Unless he has a lot of income from this partnership, I would not expect him to have a filing requirement in VA since he doesn't live here.