Sale of Rental 2022, and how to pay captial gains

[mikegc1]

sold a rental in Feb of this year. Getting out of the rental scene and are paying the captial gains. How long to I have to pay the gain, do I wait until 2023 filing, or do I need forms now to fill out? Is there a deadline? I understand the gain is one thing and the recapture is another. I understand these two are separated by subtracting the recapture from the total gain and paying the % as required on each. Is that correct?

Thanks

[KrisD15]

You will first apply depreciation recapture which is computed as this:

Original basis minus depreciation equals "Adjusted basis"

Subtract your adjusted basis from the selling price to get the total profit. 

The profit is first allocated to depreciation recapture. 

Whatever is left is capital gain

Example

Purchased 210,000

Basis-house 200,000 Land 10,000

Took 105,000 depreciation. 

Sold 400,000 

Land 20,000 house 390,000

(Land does not depreciate) 

Basis stays at 10,000

Capital gain on land 

20,000 - 10,000 = 10,000 capital gain on the land. 

Adjusted basis for house 

original basis minus depreciation 

200,000 - 105,000 = 95,000

selling proceeds minus adjusted basis 

390,000 - 95,000 = 295,000 profit

First 105,000 of profit is depreciation recapture leaving 190,000 Capital gains. 

190,000 Capital gain on house plus 10,000 on land = 200,000 capital gain total

105,000 depreciation recapture

Taxes are due as earned so you might want to send in an estimated tax payment, 

However, whether you'll face an underpayment penalty depends on other factors. 

[jrolls]

Mom inherited property in 1987 and owns 50%. Purchased originally in early 1950's for $8,000. Owner occupied by her father until 1960, when it was turned into a rental. Sold in January 2022 for $950,000. Her half of proceeds $431,434.  Files as qualified widow; 2021 adjusted gross income $42,688 with $92,272 deductions for medical care. CA taxes withheld for escrow prorata $31,635, for which she can claim 50%. Is she responsible for all depreciation of the house that she inherited in 1987? How do I determine adjusted basis from that long ago, etc.

What should I submit for her estimated taxes quarterly for 2022? Thank you!

[AmyC]

Your mom inherited the house in 1987 and her basis became the fair market value. You can check online for tax records. You might even find a real estate agent with some records of the neighborhood and prices there. From 1987 to 2022, was the house a rental or did family live there?

Let's assume the house was a rental. She should have tax records since it is an asset and they should be kept until 3 years after asset is disposed. Take a look at her 1987 return and find the 4562 for the value used. From 1987 to 2022, the house would be fully depreciated so the only basis left would be land value from 1987.

To determine her income from the house: Sales price $431,434 - 1987 land value. - 1/2  qualified selling expenses. See Sale or Trade of Business, Depreciation, Rentals - Internal Revenue Service.

If the house was not a rental, sales price- inherited value - 1/2 qualified expenses.

To determine quarterly payments, let the program do the work:

Form 1040-ES, Estimated Tax for Individuals 

Can TurboTax calculate next year's federal estimated taxes?

Can TurboTax calculate the estimated payments for next year's state taxes?

@jrolls

[Carl]

How long to I have to pay the gain,

So that you don't have to deal with an underpayment penalty, I would highly suggest you need the IRS 20% of your gain immediately, if not sooner. You can do so "right now" at www.irs.gov/payments. Make sure you print out your receipt and file it with your 2022 tax paperwork so you have it at tax filing time next year.

If your state also taxes personal income, then you should also pay your state a percentage equal to whatever your state's maximum income tax rate is. You'll pay your state separately from the IRS and get a physically separate receipt for that. How you pay  your state, depends on the state.  Check the website for your state's department of revenue or department of taxation for information.

[Anonymous_]

You can avoid the underpayment penalty if:

you wind up owing less than $1,000 in tax after subtracting their withholdings and credits, or if you 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.

[Carl]

You can avoid the underpayment penalty if:

No argument there. None at all. But you can avoid the potential of having to deal with having to figure one's way out of the penalty, if you just pay up now.

[Anonymous_]

But you can avoid the potential of having to deal with having to figure one's way out of the penalty, if you just pay up now.

I am not sure you understand how this actually works.

Provided you pay 100% (110% if your previous year's gross was more than $150,000) of the amount you owe for the previous year, you will not get a penalty if your tax liability increases dramatically in the current year.

There is no need to "figure one's way out of the penalty"; all that has to be done is to ensure one pays what one paid in the previous year.