Long Term Capital Gains Rate and Estimated Tax Payment to Avoid Penalty

[speakehouseholdt]

We financed a house for a builder on 6/30/2021.  We earned the amount of our deposit when it sold on 5/18/2023.  (1) Should we pay an estimated tax before 12/31/2023?  We are both retired and don't earn much, but received a refund last year because we have tax withholding on our Social Security.  I don't think our withholding will be enough to cover the Capital Gains.  (2) What Capital Gains rate will we have to pay?

[jtax]

We need more information to help you.

Did you live in this house as your primary residence? If so what time period?

What was the approximate purchase price and the approx. sale price?

What do you mean "earned your deposit?" ... deposits are not per se an income tax thing. Rather it is "net gain" that matters. So if you buy a house for $100k it doesn't matter (from an income-tax perspective) whether you pay $100k in cash or take out a mortgage. You paid $100k no matter if your down payment was $10k or $20k or $0. If you sell the house for $150k then you have a $150 - $100 = $50k net capital gain, which might or might not be taxable.

[speakehouseholdt]

Thanks Champ.  We gave them a $37K deposit for them to build the house.  We never lived in it although we did go to settlement so it was technically our house.  When they finished building the house, they sold it and kept all the profits.  During the 2-year period, we paid the property taxes and HOA dues for each year.  After the house sold they paid us back the $37K and everything we paid out in taxes and HOA dues plus they gave us an additional $37K as our cut of the profits.  Let me know if you need to know the price of the house and the sale price, but those profits weren't ours to keep, so I don't think you need those amounts.  The taxes and HOA dues for both years were a little over $17K (but that wasn't an expense since they paid us back).  Our only real expense was the interest we lost on the total $54K.

[Critter-3 · Accepted solution]

When they finished building the house, they sold it and kept all the profits.  NO they did not keep all the profits ... you got $37K at closing.    

During the 2-year period, we paid the property taxes and HOA dues for each year.  Carrying costs ... the RE taxes could have been deducted if you itemized deduction on the Sch A.   If you did not itemize deductions then you could have capitalized the RE taxes and the HOA fees if you had made a timely election each and every tax year this was going on. 

After the house sold they paid us back the $37K and everything we paid out in taxes and HOA dues plus they gave us an additional $37K as our cut of the profits.   So you made a profit ... long term capital gains.

Let me know if you need to know the price of the house and the sale price, but those profits weren't ours to keep, so I don't think you need those amounts.  You will need to report this sale on the Sch D ... did they issue you any kind of tax reporting form like a 1099-S ?

The taxes and HOA dues for both years were a little over $17K (but that wasn't an expense since they paid us back).  Our only real expense was the interest we lost on the total $54K.  You should have charged them interest or imputed interest should have been reported.  I am sure someone may also chime in on this thread however I highly recommend you seek local professional assistance to get this reported correctly.   As of now you seem to have a profit in the amount of the total of the RE taxes + HOA fees you paid + the profit passed onto you.  

[AmeliesUncle · Accepted solution]

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@speakehouseholdt wrote:

it sold on 5/18/2023.  (1) Should we pay an estimated tax before 12/31/2023?  We are both retired and don't earn much, but received a refund last year because we have tax withholding on our Social Security.  I don't think our withholding will be enough to cover the Capital Gains. 

(2) What Capital Gains rate will we have to pay?

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1) It sold in May, so if you should have paid Estimated Taxes, you should have paid them by 6/15/23.  Because you did not pay it by then, 'penalties' will apply (the underpayment of Estimated Tax penalty is essentially interest on what you should have paid).  The sooner you make your Estimated Tax payment, the less the penalty will be.

2)  The long-term capital gain rate is 15%.  However, that 'extra' income will likely affect other things on your tax return, such as making more of your Social Security subject to tax.  The the effective tax rate will likely be higher than 15%, depending on the specifics of your other income/situation.  Plus you may have State income tax on the gain.