Sale of my rental house questions

[jonpagel]

Just sold my single family rental; couple of questions

1.  The long term capital gain bracket is determined by my job income combined with the taxable profit from the sale correct?  So if I made $500k from my job and $200k on the sale I would be up in the 20% bracket?

2.  Do I need to pay the tax for the sale like right now using the estimated tax portal or can I just wait until I do my 2022 taxes in the new year?  I have a normal job which withholds taxes so I have never had to do the estimated taxes before…I don’t want to have a penalty if I wait 

thanks!

[Mike9241]

@jonpagel please note I had some nad dates please review because the safe harbor for 2022 100/110%  is based on your 2021 AGI 

1.  The long term capital gain bracket is determined by my job income combined with the taxable profit from the sale correct?  So if I made $500k from my job and $200k on the sale I would be up in the 20% bracket?

no. before the gain is taxed at the capital gain rate you must recapture the depreciation allowed or allowable. that's tax would probably be 25% (section 1250 recapture). which such high income if your rental activity is passive there will be an additional 3.8% net investment tax.   

2.  Do I need to pay the tax for the sale like right now using the estimated tax portal or can I just wait until I do my 2022 taxes in the new year?  I have a normal job which withholds taxes so I have never had to do the estimated taxes before…I don’t want to have a penalty if I wait 

There will be no federal penalties for not paying in enough taxes during the year if withholding
1) And timely estimated tax payments equal or exceed 90% of your 2022 tax
or
2) And timely estimated tax payments equal or exceed 100% of your 2021 tax (110% if your 2021 adjusted gross income was more than $150K)
or
3) the balance due after subtracting taxes withheld from 90% of your 2022 tax is less than $1,000
or

state laws differ

since you apparently have significant income, i would recommend making sure your federal withholding is 110% of your 2021 tax.

or you can make an estimated tax payment if you don't think you'll meet the 90%, 100/110% thresholds referred to above.  however, to avoid the penalty with uneven income generally, you have to use the annualized income method for the penalty calculation.  

Turbotax will do this calculation with the proper input.   you may want to see what's involved by looking at the AI computation on page 3 of form 2210. note that you have to determine your income, deductions and withholding for the following periods 1/1 - 3/31, then 1/1 - 5/31 then 1/1 - 8/31 the last column uses the numbers per the return.  

https://www.irs.gov/pub/irs-pdf/f2210.pdf 

sorry some bad dates

[NCperson]

@jonpagel - yes, the capital gains would be taxed at the 20% tax bracket.  Don't forget the recapture tax and the 3.8% net investment tax and any applicabtle state income tax.

[jonpagel]

Ok thanks for the detailed reply….just to recap for me……

*I have a job that withholds taxes every check, gross around 500k….

*I just sold a rental house that will have about a 300k long term capital gain

The big question which I believe you answered is do I need to give the irs a big chunk of money right now or can I wait until I do my taxes for 2022 (after the new year)….I am aware of the brackets and the recapture but I assume turbo tax will walk me thru that when I do the 2022 taxes….but I don’t want to find out then that I should have paid some right after the sale

you listed those reasons to avoid a penalty, to be safe I can just make sure I pay 110% of last years taxes and then it will all be figured out when I do my normal turbo tax return for 2022 next year?  

thanks!

[Opus 17]

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@jonpagel wrote:

The big question which I believe you answered is do I need to give the irs a big chunk of money right now or can I wait until I do my taxes for 2022 (after the new year)…

The tax system is supposed to be pay-as-you-go.  If you owe too much with your tax return, you can be penalized for under-payment even if you pay in full when you file your return.   If you have a lump sum of income that requires an estimated tax payment, that should generally be made in the quarter in which the lump sum occurs.   (For a lump sum of income between Jun 1-Aug 31, the estimated payment is due Sept 15.)  

If you increase your W-2 job withholding to cover the tax from the real estate sale, that means the IRS will be getting their money spread out from August to December.  That's not quite the same as getting an estimated payment on 9/15, but it's better than not paying anything and owing a large sum when you file your return.  Doing that will probably protect you from an under-payment penalty.  

In the worst case scenario, the IRS could consider you to be slightly underpaid from September 15 to December 31.  I'm going to estimate you owe about  $70,000 from capital gains tax and net investment tax.  If you increase your W-2 withholding by $18,000 per month for September-December, you are arguably $63,000 short in September, $45,000 short in October, $27,000 short in November, and $9,000 short in December.  I don't know if the IRS will actually look at it this way.  But if they do assess a penalty and you have never paid a penalty before, you can request a first-time abatement.

Or, leave your W-4 alone and make the estimated payment directly to the IRS by September 15.  If you over pay the estimate, you will get the difference back as your tax refund. 

[Mike9241]

@jonpagel the 110% of 2021 taxes is a safe harbor.  if you meet this test through withholding only there should be no penalty no matter how much you owe come 4/15/2023. 

however, some withholding and some estimates is a different answer

the 4 periods are:

1/1-3/31

1/1-5/31

1/1-8/31

1/1-12/31

for each period, the IRS allows you to use either 1/4 of the total year's withholding or the actual withholding for the period (must use the same method for all columns on 2210) 

estimates are only counted for a period if made by the due date for that period which is 15 days after the end of the period or 4/15,6/15, 9/15, 1/15 of the following year. dates are the next business day if the due date falls on a holiday or weekend

an example of form 2210

say that 110% of your 2021 tax is $220K of which you paid $160K through withholding and a $60K estimate in the second quarter

each column of line 10  would be $55K

assume you use even withholding for each quarter then line 11 columns would be $40K, $100K, $40k, 40K

first column line 15 is $40K (line 11) 

first column line 17 is $15k  (line 10 less line 15) so you have an underpayment for the first quarter. 

for the second column

line 12 $0K  prior column overpayment)

line 13 $100K withholding and estimate for the quarter

line 14 $15K prior quarter underpayment

line 15 $85K line 13 - line 14

line 16 $0

line 17 not applicable

line 18 (overpayment) $30K line 15 - line 10

for the third column line 18 would show an overpayment of $15K

and the 4th column would show line 18 as $0

thus if you wanted to see if you could eliminate the first quarter penalty you would have to use the annualized installment method. this can be tedious to do because the IRS requires actual amounts not just 1/4, 5/12, 2/3 and 100%