I recently sold my rental property and made a nice profit. I don't plan on purchasing another property so when do I need to pay my tax? What tax form would be used?
Thanks in advance fro your reply!
Scott Luna wrote:Hello,I recently sold my rental property and made a nice profit. I don't plan on purchasing another property so when do I need to pay my tax? What tax form would be used?Thanks in advance fro your reply!SL
Hi Scott. I think I can answer this for you as I'm a CPA who works in this space.
Generally, you would pay the tax on this when you file your 2023 tax return, which would be sometime during 2024. However, if you have a lot of tax to pay when you file, and do not have enough paid in through tax deposits during 2023, the IRS may penalize you for a so called "Underpayment of Estimated Tax" penalty. The general rule is that you are supposed to estimate your tax liability and pay in at least 90% of the expected tax liability on a quarterly basis throughout the year. There are exceptions to this penalty, such as the "safe harbor" rule, which says that if you pay in at least 100% or 110% of last year's tax (depending on your level of income) you can avoid this penalty regardless of how much you may owe at year end. This "safe harbor" is normally what our firm uses to keep clients out of this penalty.
Another strategy you may consider, even though you said you're not planning on buying another property, is to pay other business expenses, or start a new business which will show some business losses to offset or partially offset the capital gain.
There are other strategies as well you can use, but beyond the scope of this answer. In short, you should do some advance planning with a tax advisor and do a "dry run" estimate of what your 2023 tax situation may look like, then you can either pay in some money to offset the tax, or develop other strategies before the year is over to offset the income.
Our firm offers a free 30 minute consultation to discuss matters like this for new clients. Please give us a call at 817-343-0815 for more details.
Donald McCartney, CPA
You had also asked what form to use, which I forgot to answer in the previous post. To report the sale of the rental property, you would use Form 4797, which carries the gain over to Schedule D. This income would then be added to other income on the tax return. The gain would be split between the portion that is over your original cost, ( a Section 1231 gain) and any amount that represents recapture of depreciation (a Section 1250 gain). All of this assumes you have held the property for at least a year, which would make it a long term capital gain. The Section 1231 gain portion and the Section 1250 gain portion are potentially taxed at different rates, depending on your tax bracket.
If you are referring to the estimated tax deposits in my previous post, you would use Form 1040-ES to make the quarterly deposits. This Form is used to make deposits for individual returns.
In most cases, the investors in the DFWREI club report their investments either on their individual return (Form 1040) or on a pass through entity such as an S-Corp (Form 1120s), or Partnership (Form 1065) tax return. In the case of pass through entities, ultimately all the income passes through to the Form 1040 personal return of the owner(s).
Hope this helps.
I appreciate you taking the time to provide me with all the information in your replies, that was very generous of you! I did have substantial long-term losses from stocks that I think I can use to help offset some of the gains.
Again, thank you for your responses.
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