I sold a lot in 1997 as well as a small house I was renting to my son. Should I make an estimated tax payment before tax time?
You may want to make an estimated tax payment on January 15 (the date for making the fourth quarter payment) if the gain on the sale of these properties will significantly increase your income tax. First, estimate how much tax you think you will owe for 1997, then determine how much tax you've already paid in. Figuring out how much tax you've paid in during the year should be fairly simple since 1997 is over. Check your last paycheck stub for the total withholding for the year.
In order to figure out the tax consequences of the two sales, you need to know the basis of the properties. When you calculate the basis, you start with the original cost of the property. If you received the property as an inheritance, the basis is the fair market value of the property at the date of death.
But don't stop there. The longer you owned the property, the more likely it is that the basis has changed. There are several ways in which the basis can change:
Over the years you probably paid for improvements that increased the value of the property. Add the cost of any such improvements to the basis of the property. Any casualties that occurred that resulted in a casualty loss deduction on a previous tax return will reduce the basis of the property by the amount of the deduction. Reduce the basis by any depreciation deductions you have taken on your tax returns. Land is not depreciable so this won't apply to the lot you sold, but the rental house should have been depreciated (and the rental income reported as income). Please note that even if you didn't take depreciation on the rental house, you must reduce your basis by the depreciation you could have deducted.
If you need more information on how to compute depreciation on your rental property, you can call the IRS at 1-800-TAX-FORM (that's 1-800-729-3676 if you hate telephone acronyms) and request Publication 946, How to Depreciate Property.
Once you've added improvements to your cost and reduced the cost by depreciation and casualty deductions, the number that you end up with is called Adjusted Basis. When calculating gain or loss, treat the sales of the lot and the house separately, even if you sold them to the same person (unless they represent the same piece of property).
If your sales price exceeds the adjusted basis, the taxable part of your sale is the difference between the sales price and the adjusted basis. If the adjusted basis is higher than the amount you got in the sale, you have a tax-deductible loss.
It sounds like your lot was held as an investment and not used as income-producing property. If that is the case, gain or loss from the lot should be listed on Schedule D of your tax return. Gain or loss from your rental house should appear on Form 4797, arguably the most confusing of the standard tax forms. Read the instructions carefully when you fill out these forms, remembering that your goal is to end up with the taxable gain or loss as described above.
As for that estimated tax payment: Figure out how much tax you will owe in April, after comparing the total tax you owe for 1997 to the amounts you have paid in withholding. If the amount you still owe is over $1,000, you should consider making a payment on January 15. There probably will not be a penalty assessed on your tax return if the amount you have paid in withholding and estimated payments is at least as much as your 1996 income tax or if the amount due in April is not more than 10% of your total tax due.
The timing of the property sales may affect whether or not there is a penalty for underpayment of tax. If the house and lot were sold in the last three months of 1997, an estimated payment on January 15, 1998, will be considered a timely payment. If they were sold earlier in the year, an estimated payment in January will be considered a late payment. Although making the estimated payment will lessen any potential penalty, there still may be some penalty. The IRS will be glad to calculate the penalty for you after you file your tax return.
copyright © 1998 - Gail Perry