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Level 3

Investment Rehab Sell

I purchased a house in June to rehab and will complete the sell of it in late November early December.  The house was an investment purchase and will be short term capital gains.  My concern is that I have not paid any estimated taxes on the capital gains at quarterly payments because I did not expect to do a rehab this year.  I do not want to do a 1031 exchange and do not want to be penalized for not making estimated tax payments.  Are there any suggestions?

3 Replies
Level 3

Investment Rehab Sell

I should also add that I do not do house rehabs for a living and is something I may do 1 a year and then none other years.

Employee Tax Expert

Investment Rehab Sell

Unfortunately, the best you can do is send in the amount you think you will owe as soon as possible.  This will at least reduce any underpayment penalties.  That said, you may be okay since the sale won't complete until this month (according to what I read in your post).  Include a statement with your tax return explaining the situation (and why no estimates were paid).  The IRS is a pay-as-you-earn type of system.  That means that taxes are owed income is earned.  If penalties are assessed, you may request an Abatement due to the situation.  Please see the following about Penalty Abatements at the IRS website. IRS Penalty Relief 

Level 7

Investment Rehab Sell

The tax on the Short-Term Capital Gain (taxed as ordinary income) cannot be avoided.  The question is whether a penalty would be assessed for underpayment of estimated taxes.  It’s entirely possible the penalty can be avoided if either of the safe harbor rules apply.  They are:

  1. The amount you end up owing is less than $1,000.
  2. Your tax withholding for the year is 90% of this year’s tax liability or 100% of the previous year. (110% of the prior year tax liability if AGI is > $150,000 MFJ/$75,000 SINGLE

A taxpayer could win the Lottery in January of the current year but as long as he/she had 110% of last year’s W-2 withholding by years end the Underpayment of Estimated Taxes Penalty is avoided.

In addition, the fact that this transaction takes place at years end minimizes the penalty if assessed.  The penalty is, in effect, paying the IRS the interest they were unable to collect on the required Estimated Quarterly Payment.  Interest, of course, is a function of time and rate; time, in this transaction is minimal.