A few years ago I sold a large amount of stock to fund some large purchases and was surprised when I did my taxes that following spring that I was penalized for not paying enough tax during the year.
I just sold a rental property for a large gain. Since this gain is considered investment income, do I need to estimate the taxes owed and send a check into the IRS now so as to avoid any penalties? I know with real estate investment sales I also have a certain amount of time to determine if I want to do an exchange. Does that factor in in any way?
Thanks.
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@jagermeister wrote:...do I need to estimate the taxes owed and send a check into the IRS now so as to avoid any penalties?
You can avoid the penalty for underpayment of estimated tax if:
1) You owe less than $1,000 in tax after subtracting your withholding and refundable credits; OR
2) You pay withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on your return for the prior year, whichever is smaller.
@jagermeister wrote:
I know with real estate investment sales I also have a certain amount of time to determine if I want to do an exchange.
If you have already closed on the sale and actually, or constructively, received the funds, then it is too late to consider a (like-kind) 1031 exchange. You need to use a Qualified Intermediary (i.e., qualified third party) to hold the cash from the sale in the scenario you described.
@jagermeister wrote:...do I need to estimate the taxes owed and send a check into the IRS now so as to avoid any penalties?
You can avoid the penalty for underpayment of estimated tax if:
1) You owe less than $1,000 in tax after subtracting your withholding and refundable credits; OR
2) You pay withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on your return for the prior year, whichever is smaller.
Safest bet is to go ahead and pay the IRS 20% of your taxable gain now, if not sooner. You can do so online at http://www.irs.gov/payments.
If your state taxes personal income, you'll need to pay your state estimated taxes too, separately from the federal tax payment to the IRS.
If your adjusted gross income (AGI) for 2018 was more than $150,000 ($75,000 if your filing status for 2019 is married filing separately), then you need to pay at least 90% of the tax for the current year or 110% of the tax shown on your return for the prior year, whichever is smaller, in order to avoid a penalty.
Thanks for the replies!
So, I estimated my total tax withholding for this year by looking at my current paystub's ytd federal tax withheld and extrapolating out to the end of the year. I compared this figure with my total federal tax owed from last year's 1040 which is located on line 15. My extrapolated figure is well above 110% of last years tax owed so I should be ok.
Thanks for your help!
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