When to pay cap gains tax on 2nd home sale

[Terry D EA]

My client sold a second home and closed on it January 2022. Does not meet and exclusions and was a rental for one year so depreciation recapture applies to calculate the gain. Got all that. I calculated the gain and prepared estimated tax payments for them to make to avoid any failure to pay estimated tax penalties. They have spoken with someone who claims a CPA has told them they "have" to pay all of the capital gains tax at the end of the quarter of the sale. I have looked and looked and looked and cannot find anything other than a statement that says "Generally" you pay at the end of the quarter of the sale. There is no have to etc. They will have withholdings from both of their jobs but not enough to forgo paying estimated taxes. The only thing I am willing to change is to make the first quarter of 2022 a larger payment because that is when proceeds were received. Am I missing something? Is there another reference that I haven't found that says you MUST pay all of the capital gains in the quarter the home was sold. No mention of this in either Pub 523 or 701 either. I agree, it is a good idea but other circumstances need to be considered. I just wish after the third or fourth time explaining this to the client they would listen. No disrespect to CPA's but frequently wrong advice is given. Ok rant over.

[Lee B]

Rather than get in an arguing match, I would prepare the the estimated payments both ways and let your client choose.

[Terry D EA]

Not getting into any arguing match at all. Thanks for the advice though. I am meeting with these folks tomorrow and will put both scenarios in front of them. As you said, their choice. I know they’ve spent some of the funds on another property and some other things. They’re panicking because of what they were told. My advice was to take the total estimated gain and put it aside to pay each quarter.  Did they do that???? Don’t know and if they haven’t, not my problem either. I just needed to hear I gave accurate advice.

[jklcpa]

Terry, maybe you won't believe this CPA either, but the advice is basically correct.  We have a "pay as you go" tax system, and that means that the taxes owed should be paid in throughout the year as it becomes taxable.  It is possible to have enough paid in via withholding and quarterly estimates throughout the year to have a refund shown on that year's tax return and still be short and underpaid for a particular quarter's estimate.

I think everyone here knows the safe harbors for avoiding the penalty:  100/110% of the last year's tax or 90% of the current year's tax, and *that* should be calculated on a quarter by quarter basis to determine the amount of the estimate needed.  That is exactly what annualization is all about.

This is all in Pub 505 in the section for the "Estimated Taxes".  Here are some excerpts, and there are more that discusses the annualizing that I didn't copy:

Quote

How To Figure Each Payment

After you have figured your total estimated tax, figure how much you must pay by the due date of each payment period. You should pay enough by each due date to avoid a penalty for that period. If you don’t pay enough during any payment period, you may be charged a penalty even if you are due a refund when you file your tax return. The penalty is discussed in the Instructions for Form 2210.

Regular Installment Method

If your first estimated tax payment is due April 18, 2022, you can figure your required payment for each period by dividing your annual estimated tax due (line 14a of the 2022 Estimated Tax Worksheet (Worksheet 2-1)) by 4. Enter this amount on line 15. However, use this method only if your income is basically the same throughout the year.

Change in estimated tax.

After you make an estimated tax payment, changes in your income, adjustments, deductions, or credits may make it necessary for you to refigure your estimated tax. Pay the unpaid balance of your amended estimated tax by the next payment due date after the change or in installments by that date and the due dates for the remaining payment periods.

If you don’t receive your income evenly throughout the year, your required estimated tax payments may not be the same for each period. See Annualized Income Installment Method, later.

 

Also, I would say the reference for this is code sec 6654 that is the section for the penalty for failure to pay estimated tax, or enough estimated tax.

Edited March 19, 2022 by jklcpa
added code sec reference

[Terry D EA]

Judy,

I absolutely take any and all of your advice as solid and yes, I do believe your response and genuinely appreciated all of the help you have given me over the last 23 years of being on this board. My statement was not to attack CPA's. I have great respect for the profession and am sad that I am too old to take the advanced courses to obtain a CPA license. My wife still wants me to, but I don't think I have it in me. The general contention is when a person has the letters CPA behind their name, the answers or position taken is gospel.  One of my instructors in college was a CPA and wouldn't touch taxes. The statement these folks got was they "have" to pay "all" of the cap gains in the quarter of the sale. As you say, we do have a pay as you go tax system and I did say that "generally" to pay the gains tax in the quarter of the sale is true but, I used the annualized method because they do not have enough withholdings without figuring in the gain due to the spouse improperly filling out a W-4 form. They will have enough with the estimated payments to avoid the penalty. Hopefully the spouse gets the W-4 correct. Please don't take offense to may statement as none was intended toward you or any other CPA.

[Pacun]

I don't think CPAs will take offense on your comment, but I think it makes sense what the CPA is saying.  I have read that the only income that is considered to be earned evenly through out the year is income reported on W2s.  It makes sense that an estimated payment needs to be sent to the IRS on quarter where the money was received since this is a one time event. 

[Abby Normal]

I always tell them that they CAN pay the tax now, if they choose, or they can earn some interest or dividends on the money and pay it 4/15 of the following year. But, yeah, safe harbor estimates is all I would recommend, but some clients are really bad with money and they feel better paying it early.

And tell them that this CPA said that you would only use the annualized method for calculating 2022's underpayment of estimated tax, when there's a large amount of income in the 2nd, 3rd, or 4th quarter, not in the first, because it would make the penalty higher than the normal method of spreading income evenly. BUT the IRS can't penalize you if you meet the safe harbor.

And next year, when you're proven right, they'll think, wow this guy's smarter than that CPA! And they'll tell that story to family and friends.

[Abby Normal]

6 minutes ago, Pacun said:

I have read that the only income that is considered to be earned evenly through out the year is income reported on W2s.

That is something I have never heard in over 40 years. This scenario is exactly why we have safe harbor amounts, and I have never seen that fail. Never.

[jklcpa]

1 hour ago, Pacun said:

I have read that the only income that is considered to be earned evenly through out the year is income reported on W2s.

No, it's the withholding that is considered paid in ratably throughout the year, but if the preparer has payatubs and it benefits the taxpayer to use actual amounts paid in during each period, that is an option to do so.

[TexTaxToo]

The simplest thing would be for them to increase their withholding enough so they don't need to pay any estimated. Then it doesn't matter when they pay it.  They could even wait until later in the year and increase their withholding a lot.  As long as there is less than $1000 due after withholding, they won't need to file Form 2210. 

If they pay estimated and would have owed $1000 but for the estimated (and don't meet the prior year safe harbor), Form 2210 is usually needed and can be complicated - and the penalty for each period comes into play.

[DANRVAN]

22 hours ago, Terry D EA said:

They have spoken with someone who claims a CPA has told them they "have" to pay all of the capital gains tax at the end of the quarter of the sale

 

22 hours ago, Terry D EA said:

 but frequently wrong advice is given.

It looks to me that by the time it got to you it was  at least 3rd hand information, so hard to say exactly what "advice" was given by the CPA; and under what facts and circumstances the advice was given.