October 12, 2026
[Redacted Text]
Re: Request for Letter Ruling or Technical Advice Letter – Michigan Tax Treatment of Qualified Opportunity Fund Gain Previously Taxed by California
Dear [Redacted Text]:
Thank you for your [Redacted Text] email requesting guidance on the Michigan tax treatment of a capital gain from the sale of stock under IRC 1400Z-2 realized in a tax year in which the taxpayer is a resident and the ability of that resident to claim a credit for income tax imposed by another state for the same gain taxed by another state in a prior tax year.
The Michigan Department of Treasury (“Department”), in its sole discretion, may decline to issue a letter ruling and instead issue a technical advice letter or other informal guidance if it determines that a letter ruling “is not the necessary and appropriate means to resolve or clarify the issue presented in the request.” RAB 2016-20. Because the Department has made such a determination with respect to your request, the Department is issuing this technical advice letter. Only the specific taxpayer identified in a technical advice letter may rely on the Department’s position stated therein and only to the extent provided in RAB 2016-20.
Facts
The facts pertinent to your request indicate that in 2021 you used the proceeds of stock sales to invest in an LLC that allowed for deferral of the capital gain of said stock sale under IRC 1400Z-2 for investment in a Qualified Opportunity Fund. IRC 1400Z-2 allows taxpayers to defer realization of a capital gain if they invest that gain in a Qualified Opportunity Fund within 180 days of the sale of the asset. The taxpayer then realizes the gain at the earlier date of their disposition of their interest in the Qualified Opportunity Fund investment or December 31, 2026.
Your state of residence at the time of the 1400Z-2 deferral, California, did not conform to IRC 1400Z-2 and imposed tax on the capital gain in 2021. On or before December 31, 2026, you will be required to report the gain federally and are considering becoming a Michigan resident on or before that date.
Questions
1. If Michigan residency is established on or before December 31, 2026, will the federally required Qualified Opportunity Fund inclusion be included in Michigan taxable income for 2026?
2. If so, does Michigan law provide any credit, subtraction, adjustment, or other relief for the California income tax paid in 2021 on the same underlying gain, including any relief under MCL 206.255 or any other applicable Michigan provision?
Analysis
1. Is the deferred capital gain taxable in Michigan if received at a time when the taxpayer is a Michigan resident?
Yes. The starting point for taxable income under Michigan statute is federal adjusted gross income (AGI). See MCL 206.30(1). The default assumption is that taxable income, from whatever source, is allocated and taxable to Michigan for residents of Michigan. See MCL 206.110(1). The exceptions to this are those types of income allocated to other states under sections 111–115. See Id. Section 112 deals with the allocation of capital gain and differentiates the treatment of real property, tangible personal property, and intangible personal property. Most relevant here, section 112(3) allocates gain from the sale of intangible personable property to Michigan if the taxpayer is a resident.
As the deferred gain under IRC section 1400Z-2 was the sale of stock, its inclusion in AGI in a later year would constitute capital gain from the sale of intangible personal property. The deferred capital gain under 1400Z-2 must be realized at the earlier of either the date the taxpayer disposes of their interest in the Qualified Opportunity Fund investment or December 31, 2026. Thus, to the extent the gain is realized and included in AGI on a date the taxpayer is a resident of Michigan, that gain would be allocated and taxable to Michigan.
2. Does Michigan law have a mechanism to provide relief for taxation both in Michigan in the current year and California in a prior year?
No. Michigan’s remedy for double taxation for residents generally comes in two forms. The first is what was previously discussed: Michigan allows residents to allocate certain types of income to other states. This remedy is not available for the present gain, as intangible capital gains are explicitly allocated to Michigan under section 112(3), and no exception exists for the present situation in Michigan statute.
The second remedy is a credit for income tax that has been imposed by another state on income that is also taxable in Michigan. See MCL 206.255 (Your question references MCL 206.256, which outlines reciprocal agreements for personal service income. The answer offered has proceeded under the assumption that your question was referring to the credit under section 255.). MCL 206.255(1) provides in relevant part:
A resident individual…is allowed a credit against the tax due under this part for the amount of an income tax imposed on the resident individual…for the tax year by another state of the United States…on income derived from sources outside this state that is also subject to tax under this part[.]
Thus, the credit requires that the taxpayer (1) be a Michigan resident, (2) have income derived from sources outside of Michigan that is subject to tax in Michigan, and (3) have tax imposed on that income for the tax year by another U.S. state (or other qualifying government unit).
Under the presented facts, you would meet the first two elements of the credit. However, the statute’s requirement that the other state’s tax be imposed “for the tax year” that Michigan is imposing tax does not allow a taxpayer to consider taxes paid in a prior tax year to another state for the calculation of the credit. Thus, the tax paid to California in 2021 cannot be used for the calculation of the credit against your 2026 Michigan income tax liability.
Conclusion
The deferred capital gain from the sale of stock would be taxable if realized by a taxpayer at a time in which they were a resident of Michigan, and the taxpayer would not be eligible to include taxes imposed in prior tax years on the gain by other states in the calculation of the credit for income tax imposed by another state for the current tax year.
Sincerely,
/s/ David Foos
David Foos, Administrator
Direct Taxes Division
Bureau of Tax Policy