Non-resident w/ rental loss in Michigan

[Ross]

A client was renting his Michigan condo in 2009 and then sold it. He lived and worked in both Iowa and Pennsylvania in 2009. He had a rental loss of over $5,800 but a gain on the sale of $1,200. It looks like I'll have to prepare three state returns. I'll allocate the rental loss and gain on the sale to his MI return. Is this correct? He won't be able to use the net loss ($4,600) on his Iowa or Pennsylvania returns to offset his W2 income?

[Ross]

I thought I would give this a bump. TIA.

[gkaiseril]

A client was renting his Michigan condo in 2009 and then sold it. He lived and worked in both Iowa and Pennsylvania in 2009. He had a rental loss of over $5,800 but a gain on the sale of $1,200. It looks like I'll have to prepare three state returns. I'll allocate the rental loss and gain on the sale to his MI return. Is this correct? He won't be able to use the net loss ($4,600) on his Iowa or Pennsylvania returns to offset his W2 income?

First you should determine what state or states he established a tax residence in and the period of residency in that state(s), or if no tax residence has been established at a state level. This could result in a full year residence for one state, part year resident for 2 states, or a non-resident for all 3 states.

Then prepare the non-resident returns first, as you will need this information to complete the state returns for the states or state that he was a tax resident of. If a non-resident of all states, then you are done.

Now you can prepare the state or states in which he established a tax residence. As a resident of a state, all the income or loss your receive as a resident of that state is subject income tax in that state even if from another state. You will need to allocate the MI income or loss to the state or states he was a resident. The allocation the income and loss base will be based on the dates of residency. This would also apply to any other state you earned income in a different state while a resident, unless there is a wage or earning reciprocity agreement between the 2 states. You will also take the credit for taxes paid to MI state or other states the taxpayer paid state or local taxes to as a non-resident. This credit is used to remove the double taxation burden at the state level.

For PA you will also need to look at filing a municipality or local income tax return.

From Iowa's 1040 long form instructions:

page 9:
"Part-year residents: Report all income shown on federal Schedule E which was earned or received while an Iowa resident and all rents and royalties from Iowa sources and partnerships or S corporation income earned or received while a nonresident."


page 10:
"Schedule IA 130, the Iowa Out-of-state Credit Computation, is only for residents or part-year residents of Iowa who earned income while an Iowa resident which was taxed by another state or foreign country.'

PA has a restriction that the rental must be intended to create income and not to generate a loss.

[BP.]

He won't be able to use the net loss ($4,600) on his Iowa or Pennsylvania returns to offset his W2 income?

If you determine that any portion of a rental loss was allocable to his period of PA residency, then, no, the rental loss, though reportable, is not allowable as an offset against PA wage income.