Why is TT forcing a 100% income allocation to Michigan on MI-4797 even when I say it is derived in another state?

[annieland]

In entering the sale of a rental property in NY, and reporting it on my Nonresident NY return, my Michigan Resident return walk-through allows me to change the gains it pre-fills for MI to $0, but when it prints the MI-4797 form it keeps 100% on all the lines in the boxes for line 19.  I've NEVER tried to override anything in TT in my 25 years using it so I don't want to start now.  Everything else should be correct as I've spent the last year making sure every asset has been properly depreciated, pro-rated, and gain reported across 3 returns. 

Here's a screenshot of what I'm talking about.  If this is just TT behavior that won't cause me any issues with filing I can stop driving myself crazy reading every MI tax code available trying to find where I went wrong and coming up empty.  Thank you!

@TomD8 🙂

[RobertB4444]

As long as it applies $0 as the taxable amount in Michigan then you don't mind paying 100% of that.  Should be just fine.

@annieland 

[annieland]

Thanks, Robert!  Yesterday, @AmyC replied to my original longer post (with background) advising me that my MI-4797 looks totally incorrect and that should all be taxable to MI and then I'll get a credit for NY.  My problem is I don't think I owe tax to NY on my capital gains because they are offset by all my suspended losses now being realized as all my rental income and property tax and other expenses were allocated to NY for the past 5 years.

If I don't add that suspended loss on ordinary federal income back to my Michigan AGI on MI Schedule 1 I end up with much less Michigan tax owed and it just doesn't seem right to me.  I have read the entire Michigan Tax Code chapter 206, instructions for all relevant MI forms, and the MI Treasury guide for professional tax preparers and still can't figure out if the suspended loss claimed against Fed AGI should be claimed against both MI and NY when the property sale was entirely in NY.  Even though it is a "business asset disposition" this is not a qualified trade or business as MI defines it.  I'll just keep reading because I'm still not confident.

[annieland]

Also to add, I have multiple times across all my draft returns completely removed the MI return and redone NY first.  I still get the same results from MI (depending on what I change to 0 after TurboTax pre-fills all the asset disposition and recapture to Michigan).

[AmyC]

Clarifying this is rental real estate located in NY that has a suspended loss.

[annieland]

Yes @AmyC it is a NY rental. Inherited an old family property in 2019 with a beloved old tenant I couldn't evict no matter how much it ended up costing me in regular earned income, and now that it could finally be sold upon her passing I do have that loss to claim.  I saw your other post that I think you may have deleted, that MI would indeed cut me a break for taking such a bath on what happened in NY.  It could very well be true and I hope it is.  

But guess what I just learned in stepping through a return in TT Online to compare the process?  Can't e-file MI with a second copy of MI-4797 pg 2! Since I had 4 long term improvement assets disposed of not including the building, I have an extra page.  So I guess this will be a paper return in the end anyway!

I really appreciate your input.  Yesterday I gave it a whirl and called a local "tax pro" for my own peace of mind and he hadn't ever even filled out a MI-1040D, so that was no help.  This morning I put in a general inquiry to the MI Treasury asking if this loss should not be an addition to my Sch 1 MI AGI (just got in under my 400 char limit) so we'll see what they say.  I sure hope they agree with you that my Fed and MI AGI can stay the same!  I can update later :).  Thanks again!

[annieland]

Oh and yes, this is a properly SUSPENDED loss carried over 5 years across all 3 returns.  The difference in capital gain/depreciation recapture and suspended loss is around $41k.  So that reduction in AGI saves me nearly $2k in MI taxes, so I guess I really need to get this right!

[annieland]

Treasury's Response

Neither the capital gain from the sale of the rental, nor the passive loss from the rental activity should be included in MI. Thus, the capital gain would be reported as a subtraction, and the passive loss an addition on the MI return.

---

Therefore, my original reporting was correct, and Turbotax is forcing errors on my return.  Not only does it not remove the 100% when I answer it is not sourced to Michigan, it is now throwing red zeroes on line 23 of my MI-4797 after I started fresh and reinstalled MI after fully completing NY.

This is obviously a fault in Turbotax's handling of Michigan income tax law in its form calculations.  Now that I have in writing a response from the tax authority I cannot chance it, I will need to do my first override, pay my fair share, and file by mail.

-----

For reference:

Inquiry Details

Rental property sold in NY by MI resident. Disposed w/ claimed passive loss larger than capital gain. Gain/loss reported on 4797 and NYS NR return. Fed AGI reduced by the difference. Should MI AGI be adjusted with an addition on Sch 1 Ln 4 of the realized passive loss and gain on Ln 12? Or just gain added and subtracted on Ln 3&12? Not a regular business, but Sch E filed. MI4797 Ln 19 be 100%?

@AmyC 

[AmyC]

I am thrilled you got to the bottom of the issue, now to get through it. I pulled up MI forms availability and while the 4797 shows available - I see all the other forms that relate and connect. The income exclusion isn't ready yet. I think it may be time to take a break while MI finishes things up. If things don't clear up in a timely manner, I can talk you through the desktop and FORMS mode. It is best to get the program right with all the forms you need. Choose to enjoy a break from the taxes 🙂 You have done well and it will be fine.

[annieland]

Aww thanks Amy.  I'm definitely taking a break from this (but do want to finish up my Intuit Academy heheh).  But so you know, I probably spend 90% of the time in forms mode, so no worries.  I will continue to check for updates as usual, and I am in no rush to file as there are plenty of forms I'm still waiting for from the brokerages.  And I do have to file by mail anyway because MI can't seem to handle a second page of a MI-4797 🙄.