Tax payments directly to IRS for sale of vacation rental property

[kleinpaul]

My wife and I realized a substantial gain on a real estate sale (vacation property) sold on 6/30/22 that will likely result in a tax bill of over $100,000.  Do we need to make tax payments to the IRS this year or just cover the 110% of last year's taxes?

[NateTheGrEAt · Accepted solution]

Hi @kleinpaul - thanks for your question. It sounds like you are already familiar with Form 2210 for the underpayment penalty, so I'll just point out one distinction - you need to cover the 110% of prior year tax with withholding (see Line 6 instructions for 2210 here) to ensure you are not subject to the underpayment penalty. Otherwise, you would want to make the estimated payment to ensure you don't owe over $1000 when the return is filed. Also, keep in mind the potential need to file a state return and state estimated taxes for your home state as well as the state where the property was located, if different. 

Hope this information is helpful!

[kleinpaul]

Just to clarify, the 110% can be a combination of money withheld from my paycheck and payments directly to the IRS at IRS.gov/payments?

[NateTheGrEAt]

@kleinpaul I am glad you asked the followup question. To qualify under the 110% exception the only payments that count towards the 110% are withholding on a W2, withholding on a 1099 or withholding on some other form, plus excess social security withholdings. You can see this at the top of page 3 on this document: 2021 Instructions for Form 2210 (irs.gov) (see instructions for Line 6).

To avoid underpayment penalties by making estimated payments at irs.gov (or by other methods like EFTPS or mailing checks) you need to pay in enough to get to a balance due of less than $1,000. 

[kleinpaul]

So if I'm unable to get to the 110% with paycheck deductions, then I need to make a direct IRS payment of about $100,000, assuming that's the amount of taxes owed on the real estate sale?

[NateTheGrEAt]

Correct, you'd want to get as close as you can to the tax liability so that the balance due on your return is less than $1000. Keep in mind that your other income and withholding figures into it also, so (for example) if you had enough withholding to get a $5,000 refund, absent the real estate sale - and your calculation of the capital gains tax is correct - you'd need to pay in $95,000 to come out at breakeven.

[kleinpaul]

One last question, should I make the payment as soon as possible or just by year-end?

[NateTheGrEAt]

It is supposed to be made to cover the quarter in which the income happened. Since the property was sold 6/30 this was technically due by 9/15. So I would pay it as soon as possible. 

[kleinpaul]

Great, thank you!