Michigan - out of state rental income

[syoung123]

Hello, I reside in Michigan and purchased a rental house/condo in another state.  Is the net rental income exempt for Michigan state income tax, since the income is earned in another state?  If so, how should I input the exemption via TurboTax Premier and which state form would it show?

Also, if net rental income from another state is exempt for Michigan income tax, by the same token, is net rental loss also apply that it is not allowed as deduction form the MI state income tax?

[PatriciaV]

Yes, income from another state is not taxed in Michigan. Generally speaking, nonresidents are required to file a Michigan tax return only for taxable income earned or gained from Michigan sources. This applies to both income and losses from those activities.

For more information on taxable income in Michigan see the Michigan MI-1040 Individual Income Tax Instructions (PDF).

[syoung123]

Thank you for the reply.  To clarify, I am a Michigan resident:

1.  I have one property in a state where there is no state income tax.  I have net rental income from that property but there is no state income tax to pay.

2.  I have one property in a state where there is state income tax.  I have net rental loss from that property and there is no state income to pay since I have a rental loss.

3.  Rental income/loss on both properties are reported on federal schedule E, and the combined total on schedule is a gain.

I actually have these properties for some years, and in the past I did not know that I maybe able to subtract the gains from Michigan state income until now for tax year 2024.  I found the following instruction on Michigan Schedule 1 Additions and Subtractions.

The instructions for Line 4 Schedule 1 - Loss attributable to other states (Additions section) says the following:

"enter losses from a business or property located in another state which you own as a sole proprietor, a partner in a partnership, a shareholder in an S corporation, or as a member of a pass-through entity".  I am not in any of these categories.  I own the properties as an individual and do not have a formal "business" structure.  So it doesn't appear that I need to add back the rent loss.

The instructions for Line 13 Schedule 1 - Income attributable to another state (Subtractions section) says:  "Michigan residents cannot subtract salaries.....However, they maybe entitled to a tax credit for income tax imposed by government units outside of Michigan.  Residents may subtract, to the extent included in AGI:  Net business income earned in other states (which I do not own a business); Net rents and royalties from real property...located or used in another state.".  I have net rental income from a rental property in a state where there is no income tax.  So it appears that I am not entitled to a tax credit for income tax imposed by govt units outside of Michigan since this other state does not have income tax.

So it appears that:

1.  I don't have to add "rental loss" on a rental house in the Additions section since I am an individual and don't have a "business".

2.  I am not entitled to subtract "rental income" on a rental house in the state where there is no income tax.

Please advise.  Thank you.

[KrisD15]

Yes, rental income sourced from another state by a Michigan Resident is not taxable income on the Michigan return. 

Michigan starts with your Federal Adjusted Gross income, which in your case includes the rental income from one property and the rental loss from the other property, both of which are not located in Michigan. 

Michigan does not tax for (does not include in your taxable income) the income or loss from these properties because they are out-of-state. 

(It does not matter which state)

Therefore, 

if you claimed a loss on the federal return, you need to ADD that amount back in for the Michigan return. (You are not adding the loss as a loss, you are adding the loss as income) You are negating the loss. Michigan does not recognize the loss. 

if you claimed rental income on the federal return, you need to SUBTRACT that amount out for the Michigan return.  Michigan does not tax out-of-state rental income.  

In TurboTax, two screen in the Michigan State Return section ask about rental income and loss.  

The screen after that asks about Capital gains. 

Enter the income and loss from the out-of-state rentals and when the rental is sold, you will adjust the capital gain for that sale (if the Michigan tax code does not change) 

[syoung123]

Thank you for your response.  The TurboTax input screens says "out of state business income" and "out of state business loss".  It also asks "on federal return, did you report income or losses from a business, rental, or royal property which you operated entirely out of the state?"  

1.  I own the rental properties as an individual, not as a "business", and I did not form a "business" and the properties are in my name as owner.  So is it still considered as "business" income and losses that I can exclude on MI Schedule 1 Additions and Subtractions?

2.  Since I live in Michigan (MI resident) and the renal properties are out of state, are the rental properties still considered as "operated entirely out of the state"?  They are managed by property mgt companies that I hire.

3.  The MI Schedule 1 instructions talks about filing 1040H for apportionment.  TurboTax did not generate a 1040H.

Please advise.  Thank you.

[syoung123]

Thank you for your response.  The TurboTax input screens says "out of state business income" and "out of state business loss".  It also asks "on federal return, did you report income or losses from a business, rental, or royal property which you operated entirely out of the state?"  

1. I own the rental properties as an individual, not as a "business", and I did not form a "business" and the properties are in my name as owner.  So is it still considered as "business" income and losses that I can exclude on MI Schedule 1 Additions and Subtractions?
2. Since I live in Michigan (MI resident) and the renal properties are out of state, are the rental properties still considered as "operated entirely out of the state"?  They are managed by property mgt companies that I hire.
3. The MI Schedule 1 instructions talks about filing 1040H for apportionment.  TurboTax did not generate a 1040H.

Also, I have one house with a gain and one house with a loss at different states.  The net of the two is a gain.  When inputting the out of income rental income for exclusion from MI state income tax, can I combine the two into one net gain, or do I have to input one house as a loss from other states, and one house as a gain from other states?

Please advise.  Thank you.

[MarilynG1]

1. The wording is 'business or rental'.

2. Yes, the rental properties are 'operated entirely out of state' since they are not located in Michigan.

3. Since all your rental income/loss arises from out of state rentals, none of it needs to be apportioned to Michigan, so you don't need a 1040H.

@syoung123 

[syoung123]

Thank you for your response.  I have one house with a income gain and one house with a loss in two different states.  The combined gain and loss is an overall gain.  When inputting the out of state income and out of state loss for exclusion from MI state income tax into TurboTax, can I combine the one gain and one loss into one net gain, or do I need to input one house as "out of state business loss", and one house as "out of state business income"?  It looks that if I input the gain and loss separately, the loss would show on MI schedule 1 line 4 "losses attributable to other states" and the gain would show on schedule 1 line 13 "income attributable to another state".  Or does it matter whether I separate them or combine them?

Also, on the type and source of income, TurboTax automatically put in "business/rental" on MI schedule 1 line 13?

Since MI 1040H is not needed, how does Michigan verify the numbers?  Would that be from Federal Schedule E Supplemental Income and Loss that would be attached to the MI return?

[MarilynG1]

Yes, on the screenshot provided by @KrisD15, enter your Out of State Rental Income and Out of State Rental Loss amounts separately.  Yes, this is correct, as owning Rental Properties qualifies as a business in this instance. 

Yes, a copy of your Federal Schedule E will be Efiled with your Michigan return for verification. 

@syoung123 

[syoung123]

Thank you.  So this also means that I'll have to file amend returns for the last so many years?  And for the years that I might have net losses (not much) to add back to income, I'll have to pay interest penalties calculated back to the year that might have been 6-7 years ago?  And for the years that I had net gains to be deducted from income, I'll have just refunds only?

How far back do I need to go to amend the returns for all these years?  Is there a statue of limitations for this state?

[syoung123]

Thank you.  So this also means that I'll have to file amend returns for the last so many years?  And for the years that I might have net losses (not much) to add back to income, I'll have to pay interest penalties calculated back to the year that might have been 6-7 years ago?  And for the years that I had net gains to be deducted from income, I'll have just refunds only?

How far back do I need to go to amend the returns for all these years?  Is there a statue of limitation for Michigan?

[Vanessa A · Accepted solution]

The statute of limitations for Michigan is 6 years. 

Yes, if you did not properly report income and expenses, you would need to go back and amend the returns for the past 6 years. 

The years that you owe, you would have to pay along with interest and penalties. 

However, for refunds, you can only go back 4 years.  You would still make the changes to the other returns, but you would not get the refund if it was on a return further back than 4 years of when the return was due. 

For the IRS, the time you need to go back will depend on how much you are off.  If you are off by 25% or more, then you would need to go back 6 years.  If it is less than 25%, then they go back 3 years.  You can also only claim a refund for up to 3 years back. 

If you do not have the previous years version of TurboTax you can still download 2021, 2022 and 2023 here.