How to allocate out-of-state property sale on Michigan return with MI-4797?
I'm a Michigan resident and sold an inherited rental property in New York in 2024. I'm almost positive I have entered everything correctly across my Fed 1040, Sch E, 4797, etc. and non-resident New York return with everything allocated to NY. I'm an active participant, but definitely not a real estate professional so no QBI. MI defines this as "Business Income" but makes pretty clear in the tax code that any property sold in another state or country is not taxable in MI and I've never considered or reported this "business" to be apportioned across both states.
Therefore, I want to make sure I'm doing the right thing by zeroing out all lines in the "E Column" on the MI-4797 parts 1 & 2 and rows 21 & 23 on part 3. For some reason the form automatically prints with "100" for percentage of gain subject to MI tax in the line 19 box even though it's clear on the attached Sch E that the property is in NY. My MI-1040 and Schedule 1 look correct as far as adding the huge passive loss to my Michigan AGI and then subtracting the gain and depreciation recapture.
Quick background is capital gains and depreciation recapture are offset by passive suspended losses as far as Federal AGI is concerned. Received handsome step-up in basis 5 years ago, got immediate appraisal, and have reported rental income, expenses and depreciation/amortization to all 3 tax authorities for the 5 years I owned it. Capital gain for each improvement asset has been prorated with the structure and land gain proportionally. As I estimated before closing, no tax is owed to MI or NY on the sale - if I've entered everything properly, of course.
I'd be so grateful for any reassurance or feedback from anyone who may be knowledgeable about these Michigan forms. Thank you!!
Best Answers
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Hello titaneberries!
You are correct, Michigan specifically states that the gains/losses from the sale of real property is taxable in the state in which the property is located. In your case as the property is in New York, this gain would not be taxable on your MI return.
Without access to your returns, it can be difficult to say for sure if your manual zeroing out is correct. However, based on the instructions for the MI-4797, the process you have outlined would correctly report your transaction. Line 2 instructions specifically state, "For column E, enter the gain or loss subject to Michigan income tax." As this sale would qualify for the exclusion from income described earlier $0 would be the correct amount.
Additionally, MI Schedule 1 line 13 will list the income attributable to another state to be subtracted from your taxable income.
If you choose to file using FreeTaxUSA, our software will walk you through the process of entering this subtraction in the MI interview process and will generate all applicable forms and calculations.
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Hello,
New agent here. It appears that you are correct in that we do not support forms MI-4797 and MI-1040D, if you need those forms you would need to use another method to file your return.
I'm sorry for the inconvenience. Thanks for using the FreeTaxUSA Community.
Answers
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Thanks so much Jana for the reply. In the past couple days I did start a return in FreeTaxUSA and today went through the MI and NY returns, but for MI, I was only asked to enter my own calculated additions and subtractions and I didn't see anything come up for a MI-1040D or MI-4797. So it appears you guys don't support those MI forms and I do know I need them, as you saw on our MI Treasury page. That's a bummer but do tell me if I'm mistaken. I'd attach a screenshot if I knew how, but I'm beginning to suspect at this point the error I'm seeing is a limitation of the other software I'm using. Thanks!