How To Avoid Tax Penalty When Selling A Rental Property
Most Popular Reply
Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votesQuote from @Ben T.:
Hello - I will send a rental property this year. LT gain expected of about $200k. My wife and I are above $150k AGI. Can one please explain to me how to avoid underpayment penalty?
First, we have to assume that you will have a significant taxable capital gain and will NOT be using tax strategies that defer this tax, such as the already mentioned 1031 exchange. If you're not familiar with it, search Bigger Pockets, there's ton of information.
Second, the easiest thing to do is this. Look at your 2023 tax return and see how much was your total tax for 2023, line 24 of Form 1040. Let's say it was $20,000 for 2023. You take 110% of it which is $22,000.
Now, your goal is to have $22,000 withheld from your and your wife's W2s, combined. You can look at your most recent paystubs, take the YTD (year-to-date) withholdings and then prorate it for the rest of 2024. Suppose your calculation shows that you're on track to have $21,000 withheld from your paychecks in 2024.
This is $1,000 short of your goal of $22,000. Then either you or your wife, does not matter who, go to your accounting/payroll department and tell them: I need an extra $1,000 withheld from my paychecks between now and the end of the year. They will have you complete a new W4 form and then do the rest.
After that, you can forget about the underpayment penalty, Form 2210 and other complexities. You will still have to write a check to the IRS next April as you will come short of the total tax due, but without penalties.
Now, if you want to avoid having to write a check to the IRS next April, you have at least two options:
A. prepay the expected tax from your paychecks
B. implement one of the tax strategies that delay this tax
Both options require professional assistance.
9 Replies
- Real Estate Broker · Denver/Castle Pines/Colorado Springs, CO · Member since 2021 · 248 posts · 136 votes2y
For the sale, you would have to 1031 into a different property to avoid paying taxes. Essentially this delays taxes.
For quarterly payments, that depends on what your accountant advises. I pay quarterly so there is not such a large tax burden at the end of the year, however, I work on commission. May be there is a benefit to you doing this while you also have your W2 but that's a question to ask your accountant. Good luck and let us know what you find! - 2yLogan AllecBusiness MemberAccountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
There is a safe harbor for you…it’s just 110% of prior year since you’re over the $150,000 AGI.
You can also base on 90% of current year’s taxes to avoid the underpayment of estimated tax penalty.Keep in mind you can use Form 2210 along with your return to show the IRS how much income you earned by quarter and make your estimated tax payments accordingly.
Clarita CPA Group516 Reviews Quote from @Logan Allec:
There is a safe harbor for you…it’s just 110% of prior year since you’re over the $150,000 AGI.
You can also base on 90% of current year’s taxes to avoid the underpayment of estimated tax penalty.Keep in mind you can use Form 2210 along with your return to show the IRS how much income you earned by quarter and make your estimated tax payments accordingly.
Can you please elaborate on this:
Keep in mind you can use Form 2210 along with your return to show the IRS how much income you earned by quarter and make your estimated tax payments accordingly.
- 2yLogan AllecBusiness MemberAccountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
If you earned most of your income say in Q3 you can show that on Form 2210. So the IRS would expect in that case smaller estimated tax payments for Q1, Q2, and Q4 and a larger one for Q3.
Clarita CPA Group516 Reviews - 2yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Quote from @Ben T.:
Hello - I will send a rental property this year. LT gain expected of about $200k. My wife and I are above $150k AGI. Can one please explain to me how to avoid underpayment penalty?
First, we have to assume that you will have a significant taxable capital gain and will NOT be using tax strategies that defer this tax, such as the already mentioned 1031 exchange. If you're not familiar with it, search Bigger Pockets, there's ton of information.
Second, the easiest thing to do is this. Look at your 2023 tax return and see how much was your total tax for 2023, line 24 of Form 1040. Let's say it was $20,000 for 2023. You take 110% of it which is $22,000.
Now, your goal is to have $22,000 withheld from your and your wife's W2s, combined. You can look at your most recent paystubs, take the YTD (year-to-date) withholdings and then prorate it for the rest of 2024. Suppose your calculation shows that you're on track to have $21,000 withheld from your paychecks in 2024.
This is $1,000 short of your goal of $22,000. Then either you or your wife, does not matter who, go to your accounting/payroll department and tell them: I need an extra $1,000 withheld from my paychecks between now and the end of the year. They will have you complete a new W4 form and then do the rest.
After that, you can forget about the underpayment penalty, Form 2210 and other complexities. You will still have to write a check to the IRS next April as you will come short of the total tax due, but without penalties.
Now, if you want to avoid having to write a check to the IRS next April, you have at least two options:
A. prepay the expected tax from your paychecks
B. implement one of the tax strategies that delay this tax
Both options require professional assistance. - Thank you. Can I go on IRS online site and make payments from my bank account to get to 110% of 2023 tax payment? Or it has to be withheld from paychecks? I think it is just easier to use proceeds from rental property sale and pre-pay taxes online this way.
Quote from @Michael Plaks:
Quote from @Ben T.:
Hello - I will send a rental property this year. LT gain expected of about $200k. My wife and I are above $150k AGI. Can one please explain to me how to avoid underpayment penalty?
First, we have to assume that you will have a significant taxable capital gain and will NOT be using tax strategies that defer this tax, such as the already mentioned 1031 exchange. If you're not familiar with it, search Bigger Pockets, there's ton of information.
Second, the easiest thing to do is this. Look at your 2023 tax return and see how much was your total tax for 2023, line 24 of Form 1040. Let's say it was $20,000 for 2023. You take 110% of it which is $22,000.
Now, your goal is to have $22,000 withheld from your and your wife's W2s, combined. You can look at your most recent paystubs, take the YTD (year-to-date) withholdings and then prorate it for the rest of 2024. Suppose your calculation shows that you're on track to have $21,000 withheld from your paychecks in 2024.
This is $1,000 short of your goal of $22,000. Then either you or your wife, does not matter who, go to your accounting/payroll department and tell them: I need an extra $1,000 withheld from my paychecks between now and the end of the year. They will have you complete a new W4 form and then do the rest.
After that, you can forget about the underpayment penalty, Form 2210 and other complexities. You will still have to write a check to the IRS next April as you will come short of the total tax due, but without penalties.
Now, if you want to avoid having to write a check to the IRS next April, you have at least two options:
A. prepay the expected tax from your paychecks
B. implement one of the tax strategies that delay this tax
Both options require professional assistance. - 2yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Quote from @Ben T.:
No, paychecks. If you do it online, you will have to deal with timing of your payments and potentially have a penalty. This is why @Logan Allec was bringing up Form 2210: it allows you to mitigate the penalty based on timing of income and payments, but it is not easy to complete.
Quote from @Michael Plaks:
Quote from @Ben T.:
No, paychecks. If you do it online, you will have to deal with timing of your payments and potentially have a penalty. This is why @Logan Allec was bringing up Form 2210: it allows you to mitigate the penalty based on timing of income and payments, but it is not easy to complete.
Understood - so say I sell house in Sep-24; then I can adjust my remaining paychecks to catch up to 110% of 2023 tax to avoid tax penalty or I need to start having higher withholdings now?
- 2yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votesThe benefit of doing it via paychecks is that you can do it anytime, even in December
Join the conversationCreate a free account to reply, vote on answers and follow this thread.