Part Year Resident of 2 States - Sale of Real Estate

[gfizer]

I have a client who moved from Kentucky to Wisconsin in mid-April of 2023.  He sold his farm and sawmill business and all related equipment located in Kentucky in May of 2023?  Which state do I report the gains from the sale of the farm and business property to? 

[Lion EA]

Both. The property was in Kentucky, so Kentucky wants their tax, probably on a NR Kentucky return. Wisconsin will tax his worldwide income while a resident, so it'll be on a PY Wisconsin return, taking a credit for taxes paid to Kentucky on that same gain from the sale. But, I don't prepare returns for either state, so can't tell you if Kentucky has a NRPY return as one return. Read the instructions on their website. Someone will jump in here who knows about a Kentucky NRPY return.

[kathyc2]

Since property is in KY, it is taxable there.  Since it was only one month after they moved, I'd look to see if they were WI resident at the time of sale.  When did they change such things as drivers license, car plates, etc. 

[Catherine]

Might not matter where they still had their residence at the time. 

States vary, but over time more are taxing full-year income regardless of where earned. Then they adjust based on % earned in what state, or $ earned in each state, or they apportion by date. Home state will give credit for tax paid to another jurisdiction, usually up to the amount they tax on that same income. 

You'll need to research what KY and WI want for part-year resident reporting.

[Sara EA]

Part-year residents are generally taxed on income earned in the states they lived in in each part of the year.  Check the two state websites.  In the states I am familiar with, wages, interest, dividends, etc. are broken down by which state the taxpayer lived in when they were received--there is no credit for taxes paid to other states because each one only taxes the income received while t/p was a resident.  If your client was truly a resident of WI when he sold property in KY, it will probably still belong on the WI return.  Only if he was a full-year resident of WI would his income be taxed a WI rates with a credit for taxes paid to KY.

[mcb39]

The first question that comes to my mind was how long did he live on the farm and does it qualify for the main residence exemption.  Of course, the business part will have to be separated, which further complicates things. WI will tax him as a part year resident and tax him on the income made in WI. A part year KY resident is taxed on all income from all sources while a Kentucky resident and on Kentucky-source income.  Therefore, the entire sale gets taxed to KY.  KY does have partial reciprocity with WI, but only for salaries and wages earned in WI.  I think that I could prepare this return, but am glad that it is you rather than me.  BTW, you have to be domiciled for more that 183 days in KY in order to be considered a Resident.

[Randall]

I agree with mcb39.  If a resident of WI at the end of the year, he'll file KY 740-NP.  Ky source income (the sale) will have to be reported to KY.  Yes, check to see how much can be excluded as residence but the business is business.

[gfizer]

Thanks everyone.  My client is Old Order Amish so no drivers license to change.  The property was under contract prior to the time the physical move was made. It just did not close until after the move.  The farm was actually split into two tracts when sold - one was unimproved farmland and the other was the sawmill and the house and lot.  The house was built on the property after original acquisition in 2010 so figuring the exclusion for principal residence was not too difficult.  I will talk to the client to see if residency in WI was fully established by the date the closing occurred or if there was still a lot of going back and forth at that point.  Thanks for your input.

[Pacun]

The first question I have is how much "profit" we are talking about. Let's say (assuming here since the info was provided) the profit was $1,000. Then I am sure that if you report 1/3 to Kentucky and 2/3 to Wisconsin (prorated to the length of time on each state), your return will look neat and no one will bother for those extra $100 in taxes. Now if we are talking about a million dollars in profit, I am sure Kentucky might want it all the taxes on that million.  

[mcb39]

As I said, any activity that took place in Kentucky, is taxable to Kentucky, no matter where the taxpayer lived.