I sold rental property at a nice profit. Turbo Tax has automatically calculated an underpayment penalty.

[kries6]

We sold rental property at a very nice profit in March, 2022.  Turbo Tax has added a $1600 underpayment of tax penalty for federal and $400 for state!!

We are retired and have no income otherwise except for Social Security and a small amount of income from a different rental property.  Is the Turbo Tax program correct in this calculation?  Is it really mandatory to pay estimated quarterly taxes on the sale of real estate?  Is there some way to get the overpayment penalty waived?

[VolvoGirl]

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

[VolvoGirl]

And if Turbo Tax prints out estimates for next year you can ignore them.  

[1597980]

I have a similar situation.  I sold my rental property in December 2022 and TurboTax shows underpayment of tax and calculates penalty on the underpayment.  I followed your instructions and ended up with a smaller amount of penalty.  However, I'm not sure if I entered the information correctly on Form 2210 for the "annualized income".  Does rental income need to be included in each period? The instruction says to include partnership or S-Corp income but my rental is neither. Also, do I need to add the interest income received in my bank account? It is not mentioned in instructions and I only received one 1099 at year end. Do I have to pay estimated tax on the capital gain even though the sale took place in December? Could I ask for waiver of penalty because I would not have owed any taxes otherwise? The instruction seems to indicate IRS grants waiver only if you retire after age 62 or there was some sort of disaster (neither of which applies).

Thank you!

[DavidD66]

Yes, you have to pay estimated tax on capital gains that occurred in December.  Estimated tax payments for the fourth quarter were due January 17, 2023.  When completing Form 2210, yes, your net quarterly rental income/loss should be included.  You should also include interest income.  It is highly unlikely the IRS would waive the penalty for underpayment of estimated tax in your case. 

[1597980]

David, Thanks for your quick response.  I have always had W-2 income so I didn't realize I would need to make estimated tax payments and I would not have been able to figure out the amount due without preparing the return.  What a pain!  So I have to review monthly account statements for the interest income for each period?  So much work and such complicated forms.  While I will be including the rental income for each period (not exactly quarterly, the period end is 3/31, 5/31 and 8/31), it looks like I cannot  include rental expenses as deductions because I'm not eligible to use Form 8995 for QBI deductions.  Does that make sense?  Also, just double checking, for each period, the income entered is cumulative (say I have $2000 from 1/1-3/31, then $1000 from 4/1-5/31, I would enter $3000 for 1/1-5/31). am I correct? Finally, some numbers were generated for me and I don't understand what they are or if they are correct. For example, part II, annualized self-employment tax, several lines were filled in.  Does that mean self-employment tax was being calculated and charged even though I didn't have self-employment income? On the capital gains tax worksheet, I have a large amount of "uncaptured section 1250 gain" and I have no idea where it came from!

Lots of questions.  Thanks so much for your patience. 

[MarilynG1]

If you are not normally subject to Underpayment Penalty, you would most likely qualify for an exception to the penalty for 2022, if it was only the Capital Gain from the sale of one property that caused the underpayment for 2022.  

Form 2210 can be used as a worksheet and doesn't need to be filed with your tax return in many cases. It can be used to determine if there is a penalty and you may be able to leave Form 2210 off your return and have the IRS calculate your penalty and send you a bill if there is one.

If your income is generally even throughout the year, and you want to 'annualize' your income, take your total yearly interest, net rental income (loss), etc. and divide by 4 to report the same amounts for each quarter. 

Here's more detailed info on Form 2210. 

@1597980 

[1597980]

Hi, Marilyn,

Thank you so much!

2022 was an unusual year for me.  I had W-2 income for only the first 3 months, rental income through August, interest income varies month to month and finally large capital gains in December for the sale of the rental property. Because of the tax withheld on W-2, I would have received tax refund before I entered the sale into TurboTax. So in my case, do I have to add up each item of income for each period rather than divide by 4 quarters?  Seems to me I would need to file Form 2210 because my income varied and penalty can be reduced by treating the tax withheld as paid during the first quarter?  How do I get the exception to penalty with or without Form 2210?  It seems penalty is automatically calculated and added to my total tax amount due.  Separately, if I made an estimated tax payment in the next couple of days before I finalize my return, would the payment eliminate or reduce the penalty?  

Thanks so much!

[Vanessa A]

So in my case, do I have to add up each item of income for each period rather than divide by 4 quarters?  No, when filling out the form you will use the annualized method. 

Seems to me I would need to file Form 2210 because my income varied and penalty can be reduced by treating the tax withheld as paid during the first quarter? You are correct.  You will need to walk through the entries for form 2210.  As you walk through the questions for the penalty waiver, you will come to a question Annualized Income Method, do you want to annualize your income, select yes.  This will lower your penalty as your large amount of income received in the final quarter will only be "penalized" for missing your January payment.  It won't be based on the entire year. 

When you get near the end of your return, TurboTax will say lets see if we can waive the penalty.  Select yes to get to form 2210.  You can also get there by clicking Other Tax Situations>>Start next to Additional Tax Payments>>Start next to Underpayment Penalties.

 How do I get the exception to penalty with or without Form 2210? You will need to use form 2210, that is the only way. 

 It seems penalty is automatically calculated and added to my total tax amount due.  Separately, if I made an estimated tax payment in the next couple of days before I finalize my return, would the payment eliminate or reduce the penalty?  No.  In order to not get an underpayment penalty, the payment would have had to be received by January 15th. 

[1597980]

I'm sorry. I have trouble grasping the concept of "annualized method".  Since my income varied from period to period, do I add the actual income for each period?  If not, how do I calculate the income for each period?  If I add my annual year and dividend by 4, wouldn't that make my income spread equally over the 4 periods and I lose the penalty reduction since the capital gain was in 4th quart and is by far the largest item of my taxable income?  

Thanks.

[ErnieS0]

Form 2210 is a cumulative addition. Enter the income you made in each period.

For example, if you made $10,000 per month.

1. The first period is January to March: Enter $30,000
2. The second period is January to May: Enter $50,000
3. The third period is January to August: Enter $80,000
4. The last period is January to December: Enter $120,000

[1597980]

Thanks!  This clearly answered my question.  I would need to include all types of income including interest and rental as I received?  Would I deduct rental expenses somewhere as I paid for each period?  

[AbrahamT]

Yes, that's because your including your "net rental income" which is your gross rental receipts less your expenses, "NOT" your gross rental income. 

[1597980]

Thanks!  I realized it's the "adjusted" gross income I need to enter.  So that's what I did.  A couple of final questions:  for net capital gains, do I enter "carry-over loss from prior years"?  Am I correct that I don't have to worry about other entries automatically calculated for me?  (for example, I have no clue why there are columns for self-employment tax or how they calculate other lines in Part I Annualized Income Installments). 

After I annualized the income, the penalty was reduced about 1/2.  Is it worthwhile trying to ask for waiver of the remaining penalty? If I ask and IRS determines not to waive, would I be hit with additional penalty or interest for paying this amount late?

Thanks so much!

[ErnieS0]

I’m understanding your first question. The prior year capital loss carryover would be included in the calculation of your adjusted gross income.

The carryover will first offset capital gains. Up to $3,000 of the remaining amount ($1,500 if married filing jointly) can be subtracted against other income.

Since a capital loss carryover is probably being applied against the capital gain from your rental, you’d have to look at Schedule D to figure it out.

You can ask for a penalty waiver. If you do not include any penalty and the IRS denies your request then you would pay interest on the unpaid penalty.

You can file with the penalty and ask for a first time penalty abate by filing Form 843, Claim for Refund and Request for Abatement.

Learn more at Penalty Relief due to First Time Abate or Other Administrative Waiver.