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

[GlenA]

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?

[TomYoung · Accepted solution]

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

[Anonymous]

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.

[scott18]

Hello,

I guess I have a similar question. I sold a rental property in January 2023 and will owe the IRS a substantial long term capital gain tax. I'm self employed so I always pay quarterly estimated payments to the IRS. My question would be should my 1st quarter payment due April 18 2023 be much larger to account for the large long term capital gain tax realized in the 1st quarter of 2023 or can I spread the tax liability payments out evenly all through the 4 quarters? I of course do not want to incur any penalty for under payment.

Thank you.

Scott 

[Carl]

Depending on the specifics of your situation, you could probably do either and be fine. However, if you have the money for the first quarter, I'd suggest you go ahead and pay the larger amount for that first quarter and be done with it.

[RaineB]

I think my situation is a little different. I sold a rental house in May 2022 and paid a lot more than usual for taxes that year. I made sure to prepay 100 percent of the tax I'd paid in 2021 to avoid a penalty. 

Now I've sold a second rental in August 2023 and will owe a lot more tax than usual this year, too. (But slightly less than 2022, because the house was worth less.) I kept up with quarterly payments due on 15 April and 15 June, based on what I thought my income would be for 2023. Then the sale of the house changed that. 

I'll now be using the annualized income installment method for 2023. Since my taxes were so high last year, I believe I do have to pay the full amount of tax I now owe from I Jan. through 31 Aug., which includes tax due from the sale of the rental. Is that right? 

Thank you. 

[Critter-3]

If you have paid in enough to cover the 2023 tax liability you can stop (or reduce) the estimated payments yet to be made. 

You must make quarterly estimated tax payments for the current tax year (or next year) if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits. 
 
- 2. You expect your withholding and credits to be less than the smaller of: 
    90% of the tax to be shown on your current year’s tax return, or 
  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

[fanfare]

 I made sure to prepay 100 percent of the tax I'd paid in 2021 to avoid a penalty. "

If your 2022 AGI was over $150,000 then prepay 110% of the tax paid in 2022.

If your quarterly withholding and estimates in 2023 are at least 100% / 4 = 25% ( 110% / 4 for certain high income taxpayers) of your 2022 tax, there will be no penalty on your 2023 tax return, regardless of any jump in income.
You are protected from a sudden capital gain (e.g. sale of house) at year end .
You know your prior year's tax when you file by April 15, which is also the first estimated tax payment due date.

 OR

you can use the "90% of 2023 tax" rule if you can accurately project your 2023 income and income tax.

See Form 2210.

@RaineB