When do I have to pay estimated tax on a one-time capital gain?

[fjordlander]

I am self-employed and my income fluctuates each year. I always pay quarterly estimated taxes each year, and I always file an extension every year, giving me more time to contribute to my individual 401k, which affects my final tax due amount. 

This year in January 2023 I sold my rental property. I am not eligible for the capital gain exclusion so I will owe a large one-time capital gains tax on this sale. 

My question is this: when do I have to pay (estimated) capital gains tax on this sale? Do I have to pay it now (April 2023) in order to avoid penalties? Or would I be safe paying estimated taxes equal to 100% of my tax bill from 2022? (I don't know my 2022 tax bill yet as I have an extension to October 2023 to file, so this would also be an estimate).

The amount is sizable enough that if I can wait to pay the capital gains tax until the 2023 tax deadline without penalty, it would be worth it. 

Thanks for any advice

[PattiF]

Here is a chart from Kiplinger with the dates for income earned and quarterly estimated payments:

Based on this chart, the estimated payment for the sale of the rental house should be paid on April 18, 2023. The IRS does place penalties on payments that they consider late.

[fjordlander]

@PattiF Thanks! According to the article you shared: "You can also avoid the penalty if your 2023 withholding or estimated tax payments equal at least 90% of your 2023 tax liability, or 100% of the tax shown on your 2022 return (110% if your 2022 adjusted gross income was more than $150,000)."

This sounds like no matter how much estimated tax is owed for Q1 2023, I would avoid any penalty as long as my total 2023 estimated tax payments equal 100% or 110% (depending on AGI) of my 2022 tax.

Right?

Thanks again.

[PattiF · Accepted solution]

Yes, if the 2023 estimated payments are 100% or 110% of the tax liability from 2022, you will be covered and avoid any penalty.

@fjordlander 

[mobster27]

this answer contradicts the previous reply...  I understood from the first response that the capital gains tax will be due when 2023 taxes are due, as long as estimated tax payments made for 2023 are at least 100% of the taxes due in 2022.   I had a similar scenario this year...sale of a rental property in March 2023 requiring a substantial capital gain tax.  I make estimated tax payments each quarter that will total at least 110% of last year's income tax.  So, am I complying with the law by waiting until TurboTax 2023 comes out in December and using it to determine the capital gains and depreciation taxes I will owe on the income from that sale?

[tagteam]

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@mobster27 wrote:

this answer contradicts the previous reply...

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How is that? Your assessment (stated in your post) is correct as is the response by @PattiF. 

[Mike9241]

assuming you do not have tax withheld, you will avoid estimated tax penalties when filing your 2023 return if your TIMELY estimated tax payments are 100% (110% if your 2022 adjusted gross income was over ($150K) of your 2022 tax. "TIMELY" means 25% is paid by each quarterly due date. 

state laws differ if you have a state income tax. 

[mobster27]

Doing taxes now....I entered the sale information for the rental property that I sold.  Every year I make estimated taxes ob about 60% of my expected taxes and have the additional 40%+ withheld from my pension.  Boy, are these sale documents confusing! (Not TurboTax's fault!) My sale expenses were over 25000 dollars, but it is not clear how those costs were accounted for... Somehow $10713 was added to the cost (net of land) and 10758 was added to the depreciable basis...  after entering everything that I thought was asked by TurboTax, I am totally unsure of the calculations... on 6251 worksheet, there are passive gains in the amount of 2800, passive from where?  Bottom line....I am a regular person who always pays estimated taxes in the correct amount.  I sold a mid-priced rental property that I have never lived in and it appears that I am having an AMT amount imputed to me and the calculations are totally incomprehensible...where do I see the 15% on the capital gains and the 25% on the depreciation?   It appears that I need to take advantage of the live help, but what I needed along the way was a tutorial, and perhaps some sample documents that would make me more confident.  OK, I have vented, but can anyone offer any informed comfort?

[ThomasM125]

You need to review the Schedule D Tax Worksheet to see how your tax on your business property sale is calculated. It will show what income is subject to the 15% and 20% capital gains rates and the 25% maximum tax on depreciation recapture income. @mobster27 

[jtax]

You can find the 15% about on line 18 of the "Qualified Dividends and Capital Gain Tax Worksheet"

I believe the recapture is done on Form 4797 Sales of Business Property. I believe it is not taxed at 25% necessarily. Rather it is taxed as ordinary income (often less than 25%) with a max rate of 25%. see 

https://www.stessa.com/blog/rental-property-depreciation-recapture/#:~:text=After%20the%20sale%20of%....

[jtax]

re: when to pay

For the safe harbor described above (100%/110%) of prior yr liability the timing of the income does not matter as long as the quarterly payments are timely.

If your lump sum extraordinary income had been later in the year you might have been able skip earlier estimated payments. See https://www.irs.gov/pub/irs-pdf/p505.pdf page 25 "Annualized Income Installment Method"