We sold a house (rental property) in Michigan but live in Illinois. Do we need to file a Michigan return to report $5400 capital gain or add it to our Illinois return?

[DianeW · Accepted solution]

Yes. Michigan (MI) will be filed as a nonresident state.  Below is an explanation of how to handle this situation.

Prepare the nonresident state first and then your resident state.  First, use the steps here to add MI to your file.

1. Select "My Info" in the black navigation panel on the left
2. Edit by selecting the pencil next to your address
3. For a second state only: Edit by selecting the pencil next to Other state income, select MI
4. Click the image attached to enlarge and view for assistance.
   

In your case you would have a "credit for taxes paid to another state" for the income reported on the return for MI.

Resident State:  All income worldwide is required to be reported on your resident state return.  Any money that is also taxed in a nonresident state is eligible for the "credit for taxes paid to another state" when you complete your resident state return.  Your resident state does not want you to pay tax twice on the same income.

Nonresident State: Any money earned in a nonresident state is required to be reported on that state tax return (with the exception of reciprocal agreements which does not apply in this case).  The nonresident state will tax any income earned from that state.