Accounting for profits not received in year of sale

[L67-63]

My sister and I inherited a house from our father. We never lived in the house and it has been rented for more than the last 2 years. Last year, 2022, we sold the property. However, I didn't receive my share of the profits until this year, 2023. Because California was declared a disaster area, our tax filing date was automatically extended to October 18, 2023. Therefore, I have not filed my 2022 income tax.

Do I report this as income in 2022 or 2023? Because I did not know the amount of this income from 2022, I was unable to cover the amount by increasing my quarterly tax payments amounts. As a test, I entered the amount as income in my 2022 tax. As a result, TurboTax calculated the I owed an underpayment penalty of $10,000.

[Opus 17]

Because the sale occurred in 2022, you report the sale in 2022, even though your sister did not forward you the proceeds until 2023.

However, you should not owe very much tax.  Your cost basis in the home is stepped up to the fair market value on the date of the previous owners death.  Your capital gains only consists of any increase in market value between the date of the previous owners, death and the date of the sale. If the property was rented, you will also have to recapture the depreciation that should have been taken on the property while it was rented, (even if you failed to take depreciation).

You can also reduce the sales proceeds by various selling expenses, such as the real estate commission, and certain government, taxes, and fees.

if you inherited half the house, then you should report the sale of an asset using half the cost basis, half the sales proceeds, and half the selling expenses. Your sister will do the same.

[Hal_Al]

Q. As a result, TurboTax calculated the I owed an underpayment penalty of $10,000. Does that sound right?

A. No. In the case of a big jump in income, the underpayment penalty is calculated on your previous year tax liability.

For example, with the real estate sale, you have a 2022 tax liability of $50,000. You tax liability for 2021 was $10,000.  You only had $8000 of withholding for 2022. Your penalty is calculated on the $2000 difference between $10K and $8K, not the $45,000 difference between  $50Kand $8K*.

Depending on when, in 2022, the house was sold, the penalty could be reduced further, using the "annualized" method to calculate the penalty. 

Go through the penalty calculation again. 

In TT enter at:

 -Federal Taxes  (Personal in  H&B version)

   -Other Tax Situations

      -Additional Tax Payments

         -Underpayment Penalties

*More accurately, it would be the $37,000 difference between $45K (90% of $50K) and $8K.

[Opus 17]

@L67-63 

I will also comment here that TurboTax should allow you the option of declining to include a penalty. If the IRS thinks you owe a penalty, they will calculate it according to their own formula and send you a bill. Even if you allow TurboTax to calculate the penalty, the IRS will still re-calculate it, and may still send you a bill for any difference if they calculate the penalty differently. Also, if you do get the bill for a penalty, there is a procedure to request an administrative waiver or abatement if this is the first time you have ever owed a penalty.  (It’s harder to request a waiver of the penalty if you’ve already paid it.)