Just as the federal government must raise money through income and capital-gains taxes, state governments must do the same. However, each state has considerable leeway as to how it structures its tax code. Some states impose income taxes and some don't, for example. Likewise, each state has its own approach to taxing capital gains earned by its residents, or earned from the profitable sale of property within its borders.
Gather your purchase documents and receipts or invoices from any improvements or renovations you have done to the property. It is not just the purchase price of the property that establishes the cost basis, but the sum of the initial investment in the property plus all renovations and improvements, minus depreciation you have claimed.
Gather your sales documents, which establish the sales price. States that tax capital gains charge a percentage of the difference between your tax basis and the sales price, if the sales price was higher than the basis.
Contact the department of revenue for the state in which the property is located. Download a copy of the state tax return form and any supplementary forms for reporting capital gains. Each state will have its own forms to prepare, so you must go to that state's department of revenue. You can find a list of useful state government links at the Internal Revenue Service's website.
Complete the state capital-gains form as specified in its instructions, along with the state income tax return. Not every state imposes a tax on capital gain, so you might not have to pay capital-gains taxes at the state level on the sale of the investment at all. Mail the return to the address specified in the instructions.
Calculate your state tax liability before you calculate your federal tax liability. You can claim your state and local taxes as a tax deduction on your federal income tax return.