When do I need to pay tax on Capital gain from House Sale?

[skohl]

Hi, The sale of my house closes at the end of June. I will make considerable profit, which means I will owe at least 80K in capital gain taxes for Federal and also some for state. Do I need to pay that as an estimated tax payment before the end of Q3? Or can I wait until I file at the end of the year? Thanks.

[NCperson]

the answer depends on how much tax you paid last year (2018) and how much is withheld / paid this year (2019) compared to your liability.   

Walk through Form 2210 as if it were 2019 to determine if your current strategy results in a penalty (pay in Q3 to avoid it) or not (you can wait until April 15) .. Line 9 will explain the required minimum annual payment

[skohl]

Thank you for your reply. So it looks like you are saying I have to figure out my 2019 taxes way ahead of time and then go through 2210, right? I was hoping to not have to do the 2019 taxes yet, which includes figuring out the cost basis of the house, etc. Last year our combined taxes (filing jointly) were about $5500. So this year is going to be a huge increase.  This year our income other than the house sale is only about $50K and we have not paid very much in taxes so far. 

[tagteam]

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@skohl wrote:

This year our income other than the house sale is only about $50K and we have not paid very much in taxes so far. 

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Is this your main home? If so, are you aware of the Section 121 exclusion qualifications? 

See https://www.irs.gov/taxtopics/tc701

[skohl]

Yes, we will have gain far above the 500K allowance. Thanks!

[Bees]

Here are the safe harbor rules that will keep you from any penalties for underpayment from Turbotax  h 

1. Do you expect your federal income tax withholding (plus any estimated taxes paid on time) to amount to at least 90 percent of the total tax that you will owe for this tax year? If so, then you're in the clear, and you don't need to make estimated tax payments.
2. Do you expect that your income tax withholding will be at least 100 percent of the total tax on your previous year's return? Or, if your adjusted gross income (Form 1040, line 37) on your tax return was over $150,000 ($75,000 if you're married and file separately), do you expect that your income tax withholding will be at least 110 percent of the total tax you owed for the previous year? If so, then you're not required to make estimated tax payments 
3. Please remember though that if your total household income is over 250,000 mfj, you will owe a 3.8% net investment tax on the capital gains. 
4. The IRS would like their money in the quarter you receive it if you don't fall under safe harbor. https://www.irs.gov/faqs/estimated-tax/large-gains-lump-sum-distributions-etc/large-gains-lump-sum-d...
5.  ( I can't get rid of paragraph numbers..only 1 and 2 are part of the turbotax faq.)

[NCperson]

@skohl  -  unfortunately, whether you walk though 2210 or assess whether you have a 'safe harbor' via what @Bees documented, it'll be important to take a stab at your 2019 liability.  it doesn't have to be exact - just a good estimate.  you can always adjust the estimate later.   it's just critical to pay 90% of what is due to avoid any penalty.

Alternatively, you can just wait to pay anything until April 15, 2020 and pay the interest penalty for late payment.  

the IRS is just concerned you pay what is due and pay with interest if enough hasn't been submitted quarterly. 

[skohl]

Thank you!!! Looks like I'll be paying a lot of taxes in September since our house closes June 28. I was hoping capital gain from a home sale wasn't subject to "pay as you go" rules.

[tagteam]

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@skohl wrote:

I was hoping capital gain from a home sale wasn't subject to "pay as you go" rules.

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At your stated income level, all you need to be concerned with is that you pay 100% of the tax shown on your 2018 return for the 2019 tax year. If you do that, you will not incur an underpayment penalty.

[Hal_Al]

As long as you have $5500 (or the exact number from last year) of withholding or quarterly estimates done thru the year, there will be no underpayment penalty (and no form 2210 to do), if you wait until you file to pay.

However estimates and withholding are treated slightly differently, for timing. Your quarterly estimates of  $5500/4 = $1375 should be made equally during the year. That is you should have paid , at least that much in April and again by June 17.

But, as long as you total $5000, the penalty will be small, but you'll have to do a form 2210.

[tagteam]

I apologize. I saw this post in the Community under a different username and was not able to see the other questions this user posted on that board.

[Hal_Al · Accepted solution]

You can wait til the end of the year.   

You should make estimated tax payments for the current tax 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.) 

If your goal is only to avoid the underpayment penalty, then paying 100% of the prior year tax liability is the “safe haven”.  So, even if you make a third quarter payment, it doesn't have to be for the full amount.  Increasing your withholding at work is a better option.

I assume you are aware of the home sale exclusion rules. if not, here are some references:

http://www.bankrate.com/finance/taxes/capital-gains-and-your-home-sale-1.aspx

No changes under new tax law ( https://www.marketwatch.com/story/10-things-you-need-to-know-about-the-new-tax-law-2017-12-20?mg=pro...)

** If your adjusted gross income (AGI) for 2018 was more than $150,000 ($75,000 if your filing status for 2019 is married filing separately), you would need to pay in at least 110% of your 2018 tax under the General Rule to avoid an underpayment penalty. 

[skohl]

Thank you for all your help. Sorry I did not reply sooner. Selling and buying houses is all consuming.

[skohl]

Do you know if California works the same way for state taxes? From what I've read I think so, but the wording isn't 100% clear.

[jpdaut]

https://ttlc.intuit.com/community/taxes/discussion/when-do-i-need-to-pay-tax-on-capital-gain-from-ho...

California differs from federal. To avoid a penalty, you must pay on or before the below dates.
Payment Amount Due date
1 30% April 15, 2021
2 40% June 15, 2021
3 0% September 15, 2021
4 30% January 18, 2022