Help! I'm getting clobbered with recapture, AMT, and underpayment penalties

[WileyWon]

My wife and I bought a rental property in 2004 for $350,000.  For most of those years, our operating losses were limited to a statutory $25,000.  We sold the property in 2019 for $378,500 and now we are allowed to claim $67,000 of prior-years losses.  Great!!

Not so fast.  TurboTax is telling me that I have a $151,000 gain on the sale after depreciation recapture. 

I've already zero'd out all the improvements we made over the time we owned it.

Does this seem normal?

Then, I got hammered with AMT, which I believe effectively jams us into the 28% bracket.

I always thought AMT was to designed to punish those evil rich people for skating away without paying their "fair share",  We're just a retired couple trying to get out of a bad investment.

We didn't expect this treatment so it appears that we underpaid by $23,000.

TurboTax says there will be a $111 penalty from Virginia.  I'm sure there will be a ding from the Feds, too.

What am I doing wrong?

[AmeliesUncle]

Everything with the rental property seems correct.  So the only thing you did wrong was not do any tax-planning (preferably with a tax professional) ahead of time.

As for AMT, if you are "being clobbered" with AMT, it seems like you have a lot of other income, which would likely be taxed at 22% without AMT (and AMT would effectively tax you at 26%, unless your income was VERY high).  Without seeing the details, it is impossible to tell you if it is correct or not.  If you suspect something is wrong, you probably want to go to a tax professional to review it.   

[Critter-3]

If the prior year unallowed losses are correctly reported on the Sch E then they return is probably correct ... the depreciation recapture may be large due to the length of time the property was rented and the amount of depreciation allowed all of those years.  Before you file review the return very carefully. 

[fchang]

Yes, depreciation recapture is a killer!  I have the same thing, I sold my rental property in 2019 with only $5000 profit but on paper with depreciation recapturing, I made over $30,000!!  Good luck.

[VolvoGirl]

For any underpayment penalties.....

If you do not pay enough tax, you may have to pay a penalty for underpayment of estimated tax. Even if you are getting a refund you can still owe a penalty for not paying in evenly during the year.  Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. It is included in your tax due or reduces your refund.

You might be able to eliminate it or at least reduce it.  You can go to Federal Taxes tab or Personal tab, under Other Tax Situations and select Start by the Underpayment Penalties. You will answer a series of questions that may reduce or eliminate the penalty. Or you can elect to have the IRS figure the penalty for you.  It's form 2210.

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button

If you have the desktop program you can switch to Forms Mode (click forms in the upper right (left for Mac)) and open the 2210 form.  If the 2210 doesn't show up in the left column, click on Open Forms at the top of the left column.  Type 2210 in the search box and open the 2210 form.  Check box C to let the IRS calculate it.