Tax pre-payment for rental sold

[Henrietta Lee]

Hi, I sold a rental property that was rented for 16 years in CA this year. The net capital gain was $480,000. Depreciation taken was $100,000. Escrow already withheld CA State tax. I'm retired in FL with $25,000 social security annual income only. Do I need to send prepayment to cover next year's federal tax. If so, how much, when, and how to do it? I'm using TurboTax this year, but will hire a tax accountant next year. Thanks for your help.

[Eddie L.]

***Not a CPA and no filing tax return experience for others***

Form 1040-ES is used to help you calculate out your expected estimate payment. No need to actually file this with the IRS. Although still good to keep for your records if you use it.

https://www.irs.gov/pub/irs-pd...

Assumptions:

1. No other sources of income or deductions such as rental income or expenses for 2022. Sold on 01/01/2022 then maybe?

2. Assuming your 2021 Adjusted Gross Income (AGI) was $0 and all you had was $25k of social security benefits which would result in $0 of federal tax.

3. Under 65 and not blind

4. 2021 Federal Return was filed as also Single and for full 12 months.

5. Not claimed as dependent by anyone and not claiming anyone else as dependent.

6. You withheld $0 federal taxes from your social security benefits.

I'm thinking you have two options:

1.  As the first page in Form 1040-ES instructions note, you have to pay estimate tax if you expect your total IRS payments for the year to be less than smaller of 90% of 2022 Tax or 100% of your 2021 Tax. In this case you don't have to pay any estimated taxes for 2022, since you paid $0 for 2021 taxes. Doesn't mean you never have to pay but just means you don't have to prepay and can just wait until you file your 2022 tax return to pay.

2. Estimate your 2022 taxes and pay based on that. Either pay in one lump sum or in four equal payments (04/18/22, 06/15/22, 09/15/22, 01/17/23).

a  $78,255 Total Tax =  $58,427.45 ($28,549 Long Term Capital Gain x 20% tax rate + $351,451 Long Term Capital Gain x 15% tax rate) + $19,827.5 ($100,000 Unrecaptured Sec 1250 Gain +$ 25,000 social security benefits x 85% - $12,950 standard deduction subject to ordinary income tax brackets)

b. Gain may be subject to additional 3.8% Net Investment Income Tax. Maybe.... but this rough calc should cover most of what's needed for estimate purposes.