Quarterly Estimated Witholding on Flips?

Question

Hey everyone, so I sold two properties so far this year, one more in a couple of weeks, and one more hopefully before the end of the year. All in Chicago. One was a long term buy and hold and three are flips. Long term buy and hold sold in January, one flip sold in June, another flip will sell in a couple of weeks, and another flip hopefully before the end of the year. I pay quarterly estimated withholding on my real estate commission income, but I don't know about the capital gains income. And since I didn't pay any quarterly estimated withholding first quarter, will I get penalties? Can I make it up in this second quarter? Taxes drive me crazy. Why is it so hard?! Thanks so much.

David M. · Answer

@Nikki Kofkin

Oh yes, I agree with the other post (sorry, this app doesn’t let me see your post when replying so I have to do it from memory).

Flips are generally considered ordinary income subject to self employment taxes as well since the irs considers you to be dealing in inventory instead of selling an investment.

If you are also wondering about the quarterly time

phasing, I’m told if the irs thinks you are too “uneven” they will charge the interest penalty again.  But, the irs has no idea when you made your income.  If you are really concerned about it, you’d fill out f2210 including the last part, AI for ‘annual installments’, which has you reporting income and expenses by the quarter.  I haven’t done it mainly because if you found it hard to get your expenses categorized for the year correctly, you’d have to get your expenses categorized by the estimated payment periods for this form😱

Your long term capital gains tax rate right now is generally 15%.  It’s 0% if your taxable income is less than $78,750.

Do the best you can to get yourself close.  Sounds like you are doing your taxes yourself?  Then, roughly run your taxes at the end of the year to see if you need to make a payment to make sure you are close enough if you are more concerned about paying the interest penalty.  Of course, make sure you categorize your income correctly.

Remember, the irs really has no idea generally when your income came in the year.  So, as long as your estimated payments are generally reasonable, you will be fine.  I have realtor co-workers whose accountants have them pay estimated twice a year.

David M. · Answer

@Nikki Kofkin

For federal taxes, remember you need to have had withheld/paid 100% (or 110% if your income is high) of your last year’s tax liability or 90% of your tax liability at filing.  That’s part of the Safe Harbor stuff.

If your annual income yo-yo’s, then it will kinda suck sometimes as you will significantly overpaid this way.  But, just file your taxes quickly and get your refund, pandemics like Covid-19 not withstanding.

Remember, your “account” with the irs is a rolling ‘lifetime’ account.  As long as you don’t commit fraud, they don’t care...  worse comes to worse, you just a bit of penalty interest.  It’s cheaper than worrying over it or paying an accountant to perfectly figure out your tax liability for your estimated payments.  Actually, the cpa is consult says that many of his clients don’t bother figuring it out exactly.  They just pay the interest penalty every year, year after year..

Just my two cents.  Hope this helps.  Good luck.

Nikki Kofkin · Answer

Well in case anyone comes here with a similar question looking for an answer, I think this forum just answered mine: https://www.biggerpockets.com/forums/51/topics/652224-quarterly-llc-payments

Basit Siddiqi · Answer

@Nikki KofkinThe IRS pushed back the 1Q quarter estimate due to COVID-19.You were okay if you included the 1Q payment with your 2nd quarter estimate voucher.

Dave Toelkes · Answer

There are no capital gains taxes on your flips, it's all ordinary self-employment income.  Just include the flip income with your real estate commissions when you calculate your quarterly estimated tax.  Unless your profit on the rental was really large, don't worry about that one.  Your capital gains tax rate could be 0%.  I would let that one fall out at the end of the year on the expectation that your quarterly estimated tax payments will total at least 90% of your total tax due for the year

Nikki Kofkin · Answer

Thanks so much. Very helpful.

Quarterly Estimated Witholding on Flips?

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