Fund managers spend months underwriting deals, negotiating terms, and planning exits. But many overlook one of the most painful, and expensive pitfalls in real estate and private equity: state tax liabilities at disposition.

It happens more often than you think. A fund sells an asset, distributes profits, celebrates the win, and then gets blindsided by state tax bills. The money has already gone to LPs. The GP is left with two bad options: call capital back from investors or eat the cost themselves.

Either outcome destroys credibility.

At Stonehan, we see this mistake far too often. Most CPAs don’t model for multi-state exposure. They file returns after the fact. By then, it’s too late to protect the GP or the fund’s reputation.

Why State Taxes Get Missed

Most CPAs focus on federal tax. State-level exposure is treated as an afterthought. But when your fund operates across multiple states, or has investors who live in different ones—tax liabilities are unavoidable.

Here’s why GPs get caught off guard:

• Nexus rules vary by state. Most states trigger filing requirements if you own property or earn income there. Others apply thresholds based on revenue, payroll, or investor residency.

• Gains on sale create liability. Even if your fund is domiciled in Delaware, states like California and New York will still tax the gain on a property located within their borders.

• Investor residency matters. Some states require returns for investors who reside there, even if the fund doesn’t have assets in that state. That creates filing obligations for both the fund and its LPs.

Without proper planning, that’s a recipe for disaster.

Real-World Scenarios We See Often

1. The California Surprise.

   A multifamily fund sells in California, distributes profits, and later gets a six-figure bill from the state. With no reserves left, the GP has to absorb the cost or issue a capital call. Either way, investor confidence takes a hit.

2. The Withholding Nightmare.

   A debt fund with out-of-state investors fails to comply with withholding requirements. LPs are forced to file in multiple states, creating confusion, frustration, and reputational damage.

3. The Delaware Assumption.

   Many GPs assume that because their entity is domiciled in Delaware, they’re only responsible for Delaware taxes. In reality, every state where they hold assets or generate income can claim a piece of the tax.

Each of these situations can be prevented, but not after the fact.

The Investor Relations Fallout

For GPs, the financial loss hurts, but the reputational hit is worse.

Investors don’t want to hear that distributions are being clawed back to cover unexpected tax obligations. In most cases, sponsors end up absorbing the cost to preserve relationships. That’s a direct hit to GP cash flow, and a long-term trust issue that makes capital raising harder down the road.

When a fund mishandles state tax compliance, it signals a lack of operational discipline. Even strong returns won’t fully repair the perception that “the back office isn’t tight.”

In today’s environment, where investors have endless options, credibility is currency. Protecting it means anticipating state-level tax exposure before it becomes a problem.

How to Avoid the Trap

The fix isn’t complicated, but it requires foresight and coordination. Here’s how fund managers can stay out of trouble:

1. Proactive State Tax Mapping

   Identify where your fund has nexus based on property locations, income sources, and investor residency. Don’t assume your CPA is already tracking it, they probably aren’t.

2. Build Reserves at Disposition

   Hold back a portion of sale proceeds to cover expected state taxes. Even a small reserve can save you from issuing an embarrassing capital call later.

3. Leverage PTET Elections

   Pass-Through Entity Tax (PTET) elections can turn non-deductible state taxes into federally deductible business expenses. This bypasses the federal SALT cap and is especially valuable in high-tax states like CA, NY, and NJ.

4. Coordinate With Legal Counsel

   Ensure your operating agreements and offering documents address state tax obligations, withholding requirements, and reserve policies.

5. Model Quarterly Projections

   Incorporate state tax exposures into quarterly cash flow models and disposition plans. Waiting until April guarantees something will be missed.

A little foresight turns what’s usually a blind spot into a strategic advantage.

Why Most CPAs Miss It

The issue isn’t that CPAs don’t care, it’s that they’re trained for compliance, not strategy.

Box-checker CPAs focus on federal returns. They don’t model state exposures. They don’t coordinate with attorneys or administrators. They don’t tell you to reserve for state taxes at disposition.

By the time the state bill arrives, the distributions are gone, and the damage is done.

At Stonehan, our real estate and fund tax division specializes in multi-state compliance, PTET elections, and entity structuring, the areas where most firms fall short. We anticipate exposures, design proactive strategies, and integrate them directly into your operating agreements and financial models.

That’s the difference between tax filing and tax strategy.

The Hidden Cost of Doing Nothing

Ignoring state-level exposure doesn’t just create unexpected bills. It can cost you:

• Investor trust. Once burned, investors are less likely to re-up for your next fund.

• Future capital. LPs talk. A state-tax issue can quietly circulate through your network.

• Administrative chaos. Retroactive filings across multiple states can take months, and destroy your team’s bandwidth.

• Audit risk. Missing a single filing requirement can invite further scrutiny from other states.

You can’t control every variable in a deal, but you can control whether taxes become your Achilles’ heel.

Frequently Asked Questions

Q: Does my fund have to file in every state where we own property?

A: Generally, yes. Most states require a return when your fund owns or earns income from property located within their borders. Failing to file can lead to penalties and interest.

Q: What is a PTET election, and how does it help?

A: The Pass-Through Entity Tax allows partnerships and LLCs to pay state taxes at the entity level, turning them into deductible expenses at the federal level. This helps bypass the federal $10,000 SALT cap.

Q: How much should we reserve for state taxes after a sale?

A: It depends on the asset and jurisdiction, but a conservative rule of thumb is to reserve 3–5% of the gain until final liabilities are settled.

Q: Can we fix missed state filings from prior years?

A: Yes, but it’s costly. Most states will assess late fees and interest. Some offer voluntary disclosure programs that can help mitigate penalties if you act before being contacted.

Final Takeaway: Protect Your Credibility, Protect Your Cash Flow

Fund managers compete on credibility as much as returns. Getting blindsided by state taxes is one of the fastest ways to lose both.

Tax strategy isn’t just about minimizing your IRS bill, it’s about safeguarding the integrity of your entire operation. When your investors see that you’ve anticipated state-level risks, it builds confidence and reinforces your professionalism.

Most accountants react after the fact.

We design structures that prevent the problem altogether.

Act Before Year-End

As we head toward year-end, there’s still time to review your exposure, adjust reserves, and lock in smarter tax strategies before 2025 begins.

📆 Book your Tax Strategy Call with James before December 31 to:

• Review your fund’s multi-state exposure

• Implement PTET elections where applicable

• Build reserves to protect your next distribution

• Ensure full compliance without sacrificing returns

At Stonehan, we’ve helped fund managers nationwide identify hidden liabilities, prevent clawbacks, and turn tax planning into a strategic advantage.

📲 Schedule Your Tax Strategy Session Now →

Your investors trust you with their capital. Protect that trust with a proactive tax strategy that closes the gaps before they open.