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Level 1

Taxes on the sale of rental property, do I file one 1040-ES for the quarter I received the proceeds of the sale?

Form 1040-ES appears to expect the same amount of estimated taxes to be paid each quarter.  With the sale of rental property, the proceeds come in on one date.  I didn't even know that I was going to sell the property when the first estimated tax payment was due.  Logically, I should pay the estimated tax in the quarter I received the proceeds from the sale. Is that what IRS expects?

1 Best answer

Accepted Solutions
Level 9

Taxes on the sale of rental property, do I file one 1040-ES for the quarter I received the proceeds of the sale?

I think your situation is:

  1. When you prepared your 2018 income tax return four Forms 1040-ES for 2019  were created with equal quarterly payments.
  2. In 2019(?) you sold a rental property (in the second quarter of the year?) at a profit and this profit was not projected when the the 2019 Forms 1040-ES were created.
  3. Now you're unsure how to proceed when it comes to making you 2019 estimated tax payments.

While the IRS would gladly have you pay a much larger 2nd quarter estimated tax amount covering that 2nd quarter profit, that's not really necessary.  Depending on how the amounts on those 2019 Forms 1040-ES were established, you might not have to do anything beyond pay those amounts when they are due.

The US income tax system is a "pay as you go" system, and maybe that's why you think, ("logically"),  you might need to make a large 2nd quarter estimated tax payment.  But even though the term "pay as you go" suggests exactly that, that's not really the case.  It's perfectly OK to owe the government a lot of money when your tax return is due. What you really want to do is to avoid being "underpaid" (a piece of tax jargon that has a specific legal meaning) and incurring large penalties.

Most taxpayers will avoid being underpaid if they:

1)owe less than $1,000 in tax after subtracting their taxes WITHHELD and available tax credits,

OR

2)if they paid at least the lesser of
     a)90% of the tax for the current year, or
     b)100% of the tax shown on the return for the prior year.  (If last year's return shows AGI over $150K (for married filing jointly) then change that "100%" figure to "110%.)

So if you selected that second "safe harbor" to avoid being underpaid, (100%/110% of the 2018 income tax liability), there's really no need to do anything at this point except pay the remaining estimated tax payments on time.  You might have to write a large check when you send in your 2019  income tax return but that check should not include any underpayment penalties.

If you selected that first "safe harbor", (90% of current year's tax),  then you should adjust your remaining estimated tax payments to get you into the 100%/110% safe harbor.  If you do that then when TurboTax helps you create your 2019 income tax return it probably will tell you that you might be subject to an underpayment penalty because the penalty itself is calculated on a quarter by quarter basis using the assumption that all income comes in evenly throughout the year.  In that case you'd "annualize" your income, taking the profit out of the 1st quarter, (where you'd be underpaid), and putting it all in the 2nd quarter where it belongs.

Tom Young

2 Replies
Level 9

Taxes on the sale of rental property, do I file one 1040-ES for the quarter I received the proceeds of the sale?

I think your situation is:

  1. When you prepared your 2018 income tax return four Forms 1040-ES for 2019  were created with equal quarterly payments.
  2. In 2019(?) you sold a rental property (in the second quarter of the year?) at a profit and this profit was not projected when the the 2019 Forms 1040-ES were created.
  3. Now you're unsure how to proceed when it comes to making you 2019 estimated tax payments.

While the IRS would gladly have you pay a much larger 2nd quarter estimated tax amount covering that 2nd quarter profit, that's not really necessary.  Depending on how the amounts on those 2019 Forms 1040-ES were established, you might not have to do anything beyond pay those amounts when they are due.

The US income tax system is a "pay as you go" system, and maybe that's why you think, ("logically"),  you might need to make a large 2nd quarter estimated tax payment.  But even though the term "pay as you go" suggests exactly that, that's not really the case.  It's perfectly OK to owe the government a lot of money when your tax return is due. What you really want to do is to avoid being "underpaid" (a piece of tax jargon that has a specific legal meaning) and incurring large penalties.

Most taxpayers will avoid being underpaid if they:

1)owe less than $1,000 in tax after subtracting their taxes WITHHELD and available tax credits,

OR

2)if they paid at least the lesser of
     a)90% of the tax for the current year, or
     b)100% of the tax shown on the return for the prior year.  (If last year's return shows AGI over $150K (for married filing jointly) then change that "100%" figure to "110%.)

So if you selected that second "safe harbor" to avoid being underpaid, (100%/110% of the 2018 income tax liability), there's really no need to do anything at this point except pay the remaining estimated tax payments on time.  You might have to write a large check when you send in your 2019  income tax return but that check should not include any underpayment penalties.

If you selected that first "safe harbor", (90% of current year's tax),  then you should adjust your remaining estimated tax payments to get you into the 100%/110% safe harbor.  If you do that then when TurboTax helps you create your 2019 income tax return it probably will tell you that you might be subject to an underpayment penalty because the penalty itself is calculated on a quarter by quarter basis using the assumption that all income comes in evenly throughout the year.  In that case you'd "annualize" your income, taking the profit out of the 1st quarter, (where you'd be underpaid), and putting it all in the 2nd quarter where it belongs.

Tom Young

Level 9

Taxes on the sale of rental property, do I file one 1040-ES for the quarter I received the proceeds of the sale?

even if you had a $1,000,000 tax liability with no withholding on January 1, 2019, the IRS does not require full payment of taxes on that date.  you could pay 1/4 on each installment date 4/15, 6/15, 9/15 and 1/15/2020 and would incur no penalty.



on the other had say your entire liability occurred on 12/31/2019 with no withholding , your estimated tax payment of what's due wouldn't be required until 1/15/2020.


you would prepare form 2210 for 2019 using annualized income method showing all income earned in final period.  along with tax payment, again there would be no penalty.