New York Source Income for Nonresidents: Every Category, Every Sourcing Rule

Defining new york source income for nonresidents who only worked briefly in NY is one of the most common questions we get, and the answer depends entirely on the workday allocation under 20 NYCRR §132.18 rather than on any de minimis threshold. The general rule is that any day on which a nonresident performed services in NY produces NY source wages for that day, regardless of how brief the time spent was. A consultant who flew into NYC for a half-day meeting has a full NY workday for sourcing purposes, and the corresponding portion of annual compensation gets allocated to NY.

The mechanics work like this: total compensation gets multiplied by the ratio of NY workdays to total workdays. For a $400,000 W-2 employee who worked 240 total days during 2026 and had 10 NY workdays from brief client visits, the allocation is 10/240 = 4.17 percent. NY source wages are $400,000 times 4.17 percent = $16,667. NY tax on that at the top marginal rate of about 6.85 percent (for the bracket up to roughly $215,400) is roughly $1,142 of NY state tax (plus city tax if a NYC resident, which doesn’t apply to nonresidents). The number isn’t huge but the filing requirement is real.

The filing requirement under §651 and §601 attaches whenever a nonresident has any NY source income and federal AGI above the filing threshold. There’s no de minimis exception for small NY workday counts. A taxpayer with $16,667 of NY source wages and $400,000 of federal AGI must file IT-203. The Department enforces this through W-2 cross-matching with NY employers and through employer-side NY withholding reporting that flags employees whose total NY days exceed any minimum.

What this means for new york source income for nonresidents in practice is that even occasional travelers to NY for work create NY tax obligations. The travel doesn’t have to be substantial. The threshold isn’t days, it’s any presence performing services in NY. For consultants, sales representatives, and project-based professionals who fly into NY occasionally, the resulting tax exposure is modest but the filing burden adds up across multiple years. We typically advise clients to file even when the exposure is small because the cost of non-compliance discovered later is high.

Documentation for these brief-visit cases is straightforward. Calendar records showing the dates of NY visits, flight records, hotel receipts, expense reports, and meeting notes all support the workday count. The Department doesn’t typically audit low-day-count returns aggressively because the dollar exposure is small, but they will challenge inconsistent records. A taxpayer who reported 5 NY workdays one year and 50 the next without documentation supporting the variance can expect questions.

The convenience-of-the-employer rule complicates the brief-visit analysis for remote workers of NY employers. A Texas resident working remotely for a NYC employer who also flies into NYC occasionally has the convenience rule applied to the remote workdays (treated as NY workdays unless employer-required) and the physical presence applied to the visit days (treated as NY workdays automatically). The result can be that 100 percent of compensation gets sourced to NY even though the taxpayer was physically in NY only a few weeks of the year. Any new york source income for nonresidents analysis for remote workers needs to address the convenience rule directly.

Connecticut and New Jersey commuters present a slightly different fact pattern because they work in NY most days. For these taxpayers, the question isn’t whether they’re a NY workday but how to compute the days correctly. The allocation typically runs in the 80-95 percent NY range for full-time commuters, with the remainder coming from days worked from the home office, sick days, vacation days, and the occasional client trip elsewhere. The mechanics are the same as for occasional travelers but the percentages flip. The home-state credit for tax paid to NY usually absorbs most of the NY tax for commuters, although the home-state tax rate matters because the credit caps at the lesser of NY tax or home-state tax on the same income.

Multi-employer cases require separate allocation for each W-2. A taxpayer with a NY-based primary employer and a non-NY freelance client has NY workdays for the primary employer (allocated by §132.18) and separate Schedule C or 1099 income for the freelance work (allocated by §132.5 business sourcing rules). The two streams don’t mix at the allocation level even though they appear on the same individual return. Each gets its own analysis. The same applies to taxpayers with multiple W-2 jobs from different employers, where each W-2 generates its own workday allocation under its own employer-employee facts, and the resulting NY source amounts get aggregated only at the IT-203 totals level.

The Reed Corporation files dozens of returns each year for clients with brief NY presence and small NY source income amounts. The filings are mechanical and the tax exposure is modest, but the discipline of consistent filing prevents the much more expensive scenario of an audit notice five years later for unfiled returns. New york source income for nonresidents starts with the workday count, and the workday count starts with maintaining a NY-day calendar throughout the year rather than reconstructing it at filing time. Clients who keep the calendar throughout the year handle their NY filings cleanly. Clients who reconstruct from memory at filing time often miss days or count them inconsistently across years, which creates audit exposure that’s entirely preventable with basic record-keeping. The day-tracking practice we recommend is a simple spreadsheet or calendar tag system that captures every business travel day with location, purpose, and supporting documentation (flight number, hotel name, meeting notes). The recording takes a minute per day during the year and produces audit-ready records when needed. Clients who push back on the recording burden usually relent after their first audit, but the right approach is to start the recording before the audit notice arrives rather than after. Once the audit is open, the records have to be reconstructed and the reconstruction is always weaker than contemporaneous data. We file dozens of audit responses each year where the underlying facts are strong but the documentation is thin, and the Department settles those at lower numbers than the facts would otherwise support. Clean records prevent that outcome.

Partnership distributive share income produces new york source income for nonresidents at the level the partnership determines through its apportionment factor, and the partner picks up that exact amount on the individual nonresident return. Under §631(a)(1)(A) and 20 NYCRR §132.15, the partnership computes NY apportionment under §210-A (typically single sales factor for service partnerships) and allocates each partner’s distributive share between NY source and non-NY source. The IT-204-IP issued by the partnership shows the partner’s NY source amount, which flows directly onto Schedule A of IT-203.

The partner doesn’t independently recompute the allocation. The partnership has the customer location data, the payroll data, and the sales data needed to compute apportionment accurately. The individual partner doesn’t have access to this granular operational data. Trying to apply a different allocation typically gets caught when the Department of Taxation and Finance cross-matches the partner’s IT-203 against the partnership’s IT-204. Mismatches between K-1 reported amounts and individual return amounts are one of the most common audit triggers for partner-level returns.

What makes partnership K-1 income different from other categories of new york source income for nonresidents is that the partner doesn’t have to be physically present in NY to have NY source income. A Texas resident partner in a NYC-based law firm has NY source distributive share every year because the firm does business in NY. The partner never visits NY, never performs services in NY, never has any direct NY presence, but the partnership’s NY apportionment factor flows the NY source share onto the partner’s K-1 anyway. This catches many first-year limited partners off guard because they assumed no physical presence meant no NY tax.

The 2015 reforms changed the sourcing of gains from sales of partnership interests in NY-based partnerships under §631(a)(1)(C). Pre-2015, the gain on sale was generally not NY source for nonresidents (residency-based sourcing applied because the partnership interest is technically intangible). Post-2015, the gain is NY source to the extent of the partnership’s NY apportionment factor. For a retiring partner selling a 5 percent interest in a NY-based fund for $10 million with a $2 million basis, the $8 million gain is NY source roughly 80-95 percent depending on the partnership’s apportionment, producing roughly $7 million of NY source gain.

This rule change made partnership exit planning significantly more complex than it was pre-2015. Strategies that worked under the prior law (moving to a no-tax state before selling the partnership interest) no longer eliminate the NY exposure because the sourcing follows the partnership’s business activity rather than the partner’s residence. The planning now centers on partnership-level apportionment management (can the partnership shift activity to reduce NY apportionment in the year of sale?) and on installment sale structuring (can the gain be spread over years to manage marginal rates?).

Investment partnership treatment varies based on whether the partnership itself is investment-only or has business operations. A pure investment fund holding securities for its investors’ account may have very low NY apportionment if its operations are minimal, even if its general partner is based in NY. A fund management company earning fees and carry is generally NY-business at the management entity level. Partners’ K-1s from the fund and the management entity are often very different in NY source content. Limited partners in the fund see modest NY source. General partners receiving management company income see substantial NY source.

Mixed partnerships with both investment and business operations require careful K-1 review. Some partnerships compute different apportionment for different types of income within the partnership (operating income versus investment income, for example). The K-1 should break out the NY source amounts by income type, and partners reviewing K-1s should verify the breakdown matches the underlying activity. We’ve found errors in both directions during K-1 review, with some partnerships under-allocating to NY (under-stating partner tax) and others over-allocating to NY (over-stating partner tax). Both types of errors get caught on audit eventually, but partners benefit from catching them at filing time rather than later.

Tiered partnership structures (partnership owning another partnership) require layered apportionment analysis. The lower-tier partnership computes its own apportionment, allocates NY source income to the upper-tier partnership, and the upper-tier partnership then allocates further to its partners. The NY source character flows through the tiers without losing or gaining in the process. Partners at the top of a multi-tier structure can have NY source income from underlying operations they’re three or four layers removed from, which is common in private equity and venture capital structures.

The Reed Corporation works with NY-based partnerships and their nonresident partners as a coordinated team. The partnership’s IT-204 drives every partner’s IT-203, so getting the partnership-level apportionment right is the most impactful work in the chain. We typically review the IT-204 apportionment quarterly during the year to identify planning opportunities that could reduce NY apportionment for the partner group as a whole. We then work with each nonresident partner to make sure the K-1 amounts flow correctly onto the individual IT-203 and that no double-counting or missed allocation occurs. New york source income for nonresidents from partnerships is the largest single category of NY tax exposure for many high-income clients, and getting it right at the partnership level matters more than any individual-level adjustment ever could. The hidden lever in many partnership structures is customer location classification, where small changes to the customer-benefit determination can shift meaningful apportionment percentage points. We’ve seen partnerships reduce NY apportionment by 5 to 10 points through clean customer-location work without changing any underlying business activity. The savings flow proportionally to every partner’s K-1 and accumulate annually. Multi-year planning matters too, because partnership apportionment changes carry through to partnership-interest sale gains under the 2015 reforms. A partnership that reduces NY apportionment by 10 points over five years before a partner-level sale event can save substantial dollars at the partner level when the sale eventually closes. The work has to start years before the planned exit to produce real results, which is why the conversation about NY apportionment management belongs in partnership operational planning rather than tax season filing review.

Real property gains and rental income are situs-based new york source income for nonresidents under §631(b)(1)(A), meaning the tax follows the property’s location regardless of where the seller or owner lives. A Florida resident who sells a NYC apartment for $5 million with a $2 million basis has $3 million of NY source capital gain, taxed at NY rates of up to 10.9 percent. The same Florida resident has no NY tax on $3 million of stock gains because intangibles follow residency rather than situs.

Rental income from NY real property follows the same situs-based rule. A nonresident landlord collecting rent from a NYC building reports the rental income (net of deductible expenses) on Schedule E of IT-203. The income is NY source regardless of where the landlord lives. Depreciation deductions, mortgage interest, property tax, insurance, and operating expenses reduce the net rental income subject to NY tax. The mechanics mirror federal rental income reporting except for the NY sourcing layer that pulls the income onto the nonresident state return.

Like-kind exchanges under §1031 defer federal gain on real property exchanges, and NY conforms. A nonresident who exchanges a NYC apartment for a Florida apartment defers the federal gain (and the NY gain) until the replacement property is eventually sold. The original NY-source character of the deferred gain carries through the exchange chain, so the eventual recognition produces NY source income for the portion attributable to the original NY property’s appreciation. Tracking this across multiple exchanges requires careful records over what can be decades.

Installment sales under §453 produce NY source income each year as installments are received, regardless of where the seller lives in subsequent years. A nonresident who sold a NYC building on a 10-year installment basis in 2024 continues to receive NY source income from each year’s installment recognition through 2034. Moving to Florida in 2025 doesn’t reset the sourcing because the original sale was a NY situs disposition. The character is set at the time of the original sale and carries through to all subsequent installment recognitions.

Sales of pass-through entities holding NY real estate get the look-through rule under §631(b)(1)(B). If a partnership or LLC’s value derives substantially from NY real property, the sale of an interest in the entity produces NY source income to the extent of the entity’s NY real property value. The rule prevents nonresidents from using pass-through structures to avoid NY tax on real property dispositions. The look-through is heavily fact-dependent and frequently litigated. The Department’s interpretation is broad, and the courts have mostly sided with the Department on close cases.

Cooperative apartment sales produce NY source income because cooperative interests are treated as interests in NY real property for sourcing purposes. The cooperative form doesn’t change the underlying NY situs of the apartment. A Florida resident selling a NYC co-op apartment owes NY tax on the gain just as if the apartment were held in fee simple. The mechanics of the sale (cooperative board approval, transfer of shares, assignment of proprietary lease) don’t change the tax outcome. The treatment also applies to condop interests and to certain housing development cooperative structures common in NYC. The form follows function for sourcing purposes, and any structure tied to a NY-based residential or commercial real property triggers the situs-based rules.

Mortgages and refinancings don’t create new york source income for nonresidents because they’re not dispositions. A nonresident who refinances a NYC building takes out a new loan, pays off the old loan, and pockets the cash if there’s any cash-out portion. None of this is taxable for federal or state purposes. The eventual sale of the property does trigger NY tax under the situs rule, but the refinancing itself is tax-neutral. Cash-out refinancings are sometimes used as a tax-deferred alternative to selling, although the cash from the refinancing must eventually be repaid through subsequent operating cash flow or property sale. Mortgage recording tax in NY can be substantial (around 1.8 to 2.8 percent of the loan amount in NYC) and is paid to the city and state at closing, but it doesn’t create NY source income to anyone. It’s a transfer tax on the mortgage transaction itself rather than an income tax.

Real estate professional status under §469(c)(7) doesn’t change the NY sourcing analysis. A nonresident who qualifies as a real estate professional and treats rental losses as ordinary losses for federal purposes still has NY source rental income (or losses) based on the property’s NY situs. The federal characterization of the activity (passive versus non-passive) affects the federal tax treatment but not the state sourcing. NY source income remains NY source regardless of federal characterization.

The Reed Corporation works with HNW clients holding NY real estate from out of state regularly. The compliance work is mechanical (Schedule E rental income, IT-203 sourcing, depreciation tracking, capital gain computation on sale) but the planning work is meaningful. New york source income for nonresidents from real estate is one of the most expensive categories of NY tax because residency change doesn’t reduce it. The planning options center on entity structure (cooperative versus LLC versus direct ownership), exchange opportunities (1031 to non-NY property), installment structuring on sales, and the eventual estate planning that determines how the property passes to the next generation. The work doesn’t get easier through residency change, which is why we encourage clients with significant NY real estate to engage on long-term planning rather than waiting for the sale year. The 1031 exchange option deserves particular attention because it allows real economic deferral of the NY gain across decades. A nonresident landlord with a $5 million NYC building and $3 million of latent gain can exchange into Texas or Florida property and defer the NY recognition indefinitely until the eventual sale of the replacement property. If the replacement property is held until death, the basis steps up under §1014 for federal purposes and the NY deferred gain is effectively eliminated as well. The estate plan should account for the carryover NY-source character so the property passes cleanly to heirs without triggering NY tax. We coordinate the 1031 exchanges with estate planning attorneys to make sure the long-term structure matches the family’s wealth transfer goals across both federal and NY-state objectives.

The convenience-of-the-employer rule under 20 NYCRR §132.18(a) is the single rule that most expands the scope of new york source income for nonresidents who work remotely. The basic rule treats remote workdays from a non-NY location as NY workdays for sourcing purposes when the employer is NY-based and the remote arrangement was chosen for the employee’s convenience rather than the employer’s necessity. The practical effect is that a remote employee of a NYC firm can have 100 percent NY source wages even though she never physically sets foot in the state.

The rule’s origin traces to 20 NYCRR §132.18 and the NY tax department’s longstanding position that telecommuting from outside NY doesn’t escape NY taxation when the employer is NY-based. The Zelinsky case (NY Court of Appeals 2003) upheld the rule against constitutional challenges, confirming that NY can tax the wages of a Connecticut resident professor who worked remotely for a Cardozo Law School position based in NY. The decision settled the constitutional question and the rule has applied consistently since.

The pandemic period (2020-2022) created widespread confusion about whether COVID-driven remote work qualified for relief from the convenience rule. The Department resolved this in TSB-M-20(1)I, holding that pandemic-related remote work is still convenience-based unless the employer formally reassigned the employee to a non-NY location with specific business justification. Most pandemic-era remote workers ended up owing NY tax on their full compensation, and the resulting audit wave is still working through the system in 2026. Anyone who worked remotely for a NY employer during the pandemic and didn’t file IT-203 should expect a notice eventually if total compensation crossed five figures.

The relief from the convenience rule requires showing that the remote location is required by the employer for a bona fide business reason. The Department’s standard is high and the burden is on the employee. Acceptable reasons include the remote location being a client site assignment (the employee is working from the client’s office because the work demands it), a bona fide branch office (a separate operational location with employees, customers, and business purpose), or specific business necessity (the employee’s role requires presence in a particular location that isn’t NY).

Unacceptable reasons include employee preference (lifestyle choice, family considerations, cost of living), informal arrangements (employer agreed to allow remote work but didn’t require it), and pandemic-era remote work (treated as convenience under TSB-M-20(1)I). Documentation supporting employer requirement must be contemporaneous and specific. A letter from the employer dated three years later saying the remote work was required typically doesn’t suffice. The auditor will look for underlying business facts showing the remote arrangement was operationally necessary.

Quantifying the convenience rule impact on new york source income for nonresidents requires modeling the difference between physical-presence sourcing and convenience-rule sourcing. For a $300,000 Texas-based employee of a NYC firm with 10 actual NY workdays per year, physical-presence sourcing produces about $12,500 of NY source wages (4.17 percent allocation). Convenience-rule sourcing produces $300,000 of NY source wages (100 percent allocation). The NY tax differential is approximately $26,000 per year. Multiply across multiple years and the cumulative cost is meaningful. The post-employment compounding effect is even larger because the higher NY-source AGI in working years often pushes into higher marginal brackets, including the top NY rate of 10.9 percent for income above $25 million in the highest bracket.

Some states have reciprocal arrangements with NY that affect the convenience rule application. Connecticut and New Jersey both have arrangements with NY for full-time commuters that smooth the cross-border tax treatment. These arrangements don’t eliminate the convenience rule, but they often reduce double taxation through credit mechanisms. The home state credit for NY tax paid is typically available for the convenience-rule-sourced wages, although the credit is limited to the home state’s tax on the same income. For full-time commuters from CT or NJ to NY, the net additional tax burden from the convenience rule is small once home-state credits are applied.

Employer-side handling of the convenience rule matters for the practical mechanics. NY-based employers are required to withhold NY tax on wages of NY-source employees, which includes convenience-rule-sourced remote workers. Many employers don’t fully apply this rule, resulting in under-withholding that the employee discovers at filing time. The employee then owes additional NY tax at filing, sometimes with underpayment penalties. Employees who know the convenience rule applies should consider voluntary additional NY withholding through Form IT-2104 to avoid the year-end surprise.

The Reed Corporation files IT-203 returns for hundreds of remote workers of NYC employers annually, and the convenience rule analysis is core to almost every one of those filings. We model the differential between physical-presence sourcing (often the employee’s intuitive expectation) and convenience-rule sourcing (the Department’s position) to show clients the exposure. For most remote workers, the choice isn’t to fight the rule, it’s to file accurately under the rule and avoid the underpayment penalties that come from ignoring it. New york source income for nonresidents under the convenience rule is one of the most expensive features of the NY system for high-income remote workers, and there’s no realistic planning workaround short of changing employers or convincing the current employer to formally reassign the role to a non-NY location with documented business justification. The formal reassignment path works occasionally for senior employees with negotiating room, particularly when the role naturally aligns with the employer’s business in another state (a regional sales role, a client-site engagement, a remote office build-out). The employer files paperwork showing the role’s business location is the non-NY site, and the employee’s wages get sourced based on physical presence in that location. The rest of the year, when the employee travels to NY for visits, the NY workdays get allocated as physical-presence NY workdays under the standard rule. The hybrid arrangement can produce dramatically lower NY tax than pure convenience-rule treatment, but it requires real commitment from the employer to formalize the role’s location. Employers often resist this because it can complicate state withholding obligations for them, but for high-value employees the negotiation is worth having before accepting a remote arrangement that defaults to convenience-rule treatment.

The split between intangibles and real property is the single most important distinction in new york source income for nonresidents because it determines whether a capital gain produces NY tax at all. Intangibles (stocks, bonds, mutual funds, options, futures, cryptocurrency, partnership interests in non-NY-real-estate partnerships, options on intangibles) are residency-sourced under §631 and produce no NY source income for nonresidents. Real property (and tangible property in NY at the time of sale) is situs-sourced and produces NY source income regardless of the seller’s residence.

Residency-based sourcing for intangibles is one of the most favorable features of the NY system for high-net-worth nonresidents. A Florida resident selling $20 million of appreciated Apple stock through a NYC-based brokerage account owes zero NY tax on the $15 million gain, even though the broker, the exchange, and the issuing company are all in NY. The same gain in a NY-resident’s account would generate roughly $1.6 million of combined state and city tax. The differential is one of the largest single tax planning levers available to high-income NY residents considering relocation.

The intangibles category includes most categories of investment assets. Stocks, bonds, mutual funds, ETFs, options, futures, and similar financial instruments are all intangibles. Cryptocurrency falls into the intangibles category under both federal (Notice 2014-21) and state (TSB-M-14(1)C) guidance. Partnership interests are technically intangibles, but the 2015 reforms to §631 make gains on sales of NY-business partnership interests effectively situs-sourced through the look-through mechanism. The clean intangibles treatment applies to truly passive financial investments without underlying NY real property.

Real property is the opposite. NY real property (apartments, buildings, land, condominiums, cooperative shares) is situs-sourced, meaning the location of the property determines NY source, not the seller’s residence. A nonresident selling a $5 million NY apartment with $2 million of basis has $3 million of NY source capital gain. The NY tax on that gain at the top marginal rate of about 10.9 percent is roughly $327,000, plus federal capital gains tax and any other applicable taxes. The same $3 million gain on out-of-state real property would generate no NY tax for the nonresident.

Sales of pass-through entities holding NY real property get the look-through treatment under §631(b)(1)(B). The interest itself is technically intangible, but the underlying NY real property pulls the gain into NY source to the extent of the entity’s NY real estate value. A Florida resident selling an interest in a NY-based real estate partnership that owns $20 million of NYC buildings produces NY source gain in proportion to the buildings’ contribution to the partnership’s value. The look-through prevents the structure from converting situs-based real property gains into intangible-based residency-sourced gains.

Restricted stock units and stock options are technically intangibles but get special workday-allocation treatment under §132.18(e) rather than residency-based sourcing. RSU income at vesting is sourced based on workdays during the vesting period, and option income at exercise is sourced based on workdays during the period from grant to exercise. An employee who worked in NY for the first two years of a four-year RSU vest and then moved to Texas has 50 percent NY source on the vesting income regardless of where she lives at vesting. The workday allocation overrides the otherwise applicable intangibles rule.

Carried interest gains for fund managers depend on the fund’s underlying holdings. Carry tied to securities held by the fund is residency-sourced (intangibles rule). Carry tied to NY real property is situs-sourced (real property rule). The look-through applies. A NY-based fund manager moving to Florida before realizing carried interest on a NY real estate fund still has NY source income on the carry. The same manager realizing carried interest on a securities-focused fund after the move has no NY source income on that portion. The character matters and requires fund-by-fund analysis at the partner level.

Cryptocurrency gains fit cleanly into the intangibles category for sourcing purposes under TSB-M-14(1)C. A nonresident selling Bitcoin owes no NY tax on the gain even if the exchange is based in NY. The crypto is intangible property and follows residency rather than situs. This treatment is the same across most state tax systems and provides clean planning opportunity for nonresidents holding cryptocurrency. The main planning consideration is timing the disposition relative to residency, which works the same way as it does for stock sales. NFT sales follow similar treatment for sourcing purposes since the IRS has signaled that NFTs are generally digital assets within the broader cryptocurrency framework, although the underlying asset type can shift the analysis in edge cases involving real-world-asset tokenization.

The Reed Corporation models the intangibles versus real property differential as part of every residency change analysis for HNW clients. The savings on intangibles sales typically dwarf the tax implications of every other category combined. New york source income for nonresidents from intangibles is essentially zero (after proper residency establishment), while NY source income from real property remains regardless of residency. Clients planning major liquidity events involving intangibles benefit enormously from establishing nonresidency before the sale. Clients with NY real estate need different planning levers (1031 exchanges, installment sales, entity restructuring, estate planning) because residency change doesn’t help. The right planning approach depends on which side of the intangibles-versus-real-property line the asset falls on, and that determination should be made early in any major asset disposition planning. The classification mistakes we see most often involve mixed-asset entities where the intangible characterization gets applied to gain that should have been treated as real-property-pulled-in under the look-through rule. A nonresident sells an interest in a partnership owning a $40 million NYC building and treats the gain as intangible-residency-sourced. The Department’s audit catches the look-through and assesses NY tax on the real-property-derived portion, with penalties. The fix is to do the analysis at the time of sale rather than at audit. Look-through analysis for pass-through interest sales should be documented in the closing file, with allocations between intangibles and real property identified explicitly. The Department typically accepts well-documented allocations even when they push more value into the intangible category, but pushes back hard when the allocation appears post-hoc or undocumented. Front-load the analysis and the audit defense is straightforward.