Tax strategy on 2020 RE Cap gains

[doneat54]

We are closing on an investment property (not primary home) this month or next (Dec 21 latest), that will net around $200k on which cap gains are due. I intend to reach out to our tax accountant, but I thought I would ask here as well, should we send a check to the IRS in 2020? Any strategies to lessen the sting. I am already accepting that we pay the 15% on it, but just wonder about the best what/when. Bought in 1994. TIA....

 

[Dash man]

I would pay something before January 15 unless you’ve paid enough to reach 90% of what you owe. Don’t forget you’ll have to pay recaptured depreciation too.

 

[doneat54]

I would pay something before January 15 unless you’ve paid enough to reach 90% of what you owe. Don’t forget you’ll have to pay recaptured depreciation too.

Thanks. It is a lot of undeveloped land, obviously never rented, so I don't think the recap depreciation is an issue here.

 

[CardsFan]

I would pay something before January 15 unless you’ve paid enough to reach 90% of what you owe. Don’t forget you’ll have to pay recaptured depreciation too.

If you have met your safe harbor number (and that varies from 90% to 110% of last year's taxes) then you are fine. If not, then I would pay an estimated in January. There will be forms to file proving the income was later in the year. That does not always work with state taxes, as I found out. Still had to pay a penalty for late taxes.

 

[cathy63]

I think the easiest thing to do is make an estimated tax payment on or before Jan 15 2021 that will bring your total 2020 payments up to 110% of your 2019 tax (line 16 from last year's 1040). Your safe harbor is 110% because your income will be over $150K. You'll owe more when you file your final return, but you'll have paid enough in advance to avoid a penalty.

You could also do as Dash man suggests and pay 90% of this year's tax, but that means you have to figure this year's tax early. It sounds like you're reasonably sure that the total owed will be more than 110% of last year's tax, since you expect to be paying 15% on the $200K, so that should be less work to calculate.

 

[Trooper]

If you haven't met your safe harbor yet, then just pay whatever is needed in January to meet it. The amount of tax owed on the sale is irrelevant for estimated taxes, as long as you meet the safe harbor. Of course, come April 15, it will be relevant

I'm in the opposite situation - sold investment land at a loss this year, so I'll enjoy some carry forwards.

 

[Sunset]

Thanks. It is a lot of undeveloped land, obviously never rented, so I don't think the recap depreciation is an issue here.

As long as you didn't rent the land, and therefore didn't have to depreciate it, then you are correct (IMHO) that recapture is non-existent.

 

[kaneohe]

I think the easiest thing to do is make an estimated tax payment on or before Jan 15 2021 that will bring your total 2020 payments up to 110% of your 2019 tax (line 16 from last year's 1040). Your safe harbor is 110% because your income will be over $150K.

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Which yrs income will be > 150K?

 

[doneat54]

Which yrs income will be > 150K?

2020 will be. The gain on this sale alone is over $150k. On top of that, DW is still working.

 

[cathy63]

2020 will be. The gain on this sale alone is over $150k. On top of that, DW is still working.

Oh I think what kaneohe is getting at is that it's your 2019 income that determines whether your safe harbor amount for 2020 is 100% of 2019 or 110% of 2019. I always forget that it's the prior year's income that matters for that calc. If your 2019 income is less than $150K, you only need to pay 100% of your 2019 tax to reach safe harbor in 2020.

 

[audreyh1]

That’s right - with safe harbor based on prior year’s taxes, you can get quite a break going from a low tax year to a high tax year.

 

[pb4uski]

If your projected taxable income for 2021 is less than $80,800, you might consider splitting the gain between 2020 and 2021 to take full advantage of the 0% LYCG tax bracket. To split the gain you would need to do an installment sale and defer receiving a portion of the proceeds to January 2021 by taking the amount that you want to defer as take a mortgage note from the buyer at closing ... but since you expect to close in December 2020 it might not be a big deal... you would get most of the money in December and the remainder in January.

So for example, if your 2021 estimated taxable income is $50,800, by deferring $30,000 of gain to 2021 you would save $4,500.

It might complicate things from the buyer's side though. Just a thought.

 

[Onward]

Any strategies to lessen the sting.

How about deferring all tax (potentially indefinitely) by doing a 1031 exchange?

If (like me) you don't want to deal with property mgmt, you can 1031 into a Delaware Statutory Trust and just collect monthly income.