Do you pay estimated taxes on your rental income? Why or why not? In Ray-N-Pa's post, a few persons talk about having to pay large amounts to the IRS in April, but I don't understand why they would, if they were paying estimated taxes, as I do. What am I missing here? I pay estimated taxes because TurboTax says I should. I didn't use to pay estimated taxes, but I think I paid a penalty for that, along with having to write a big check in April. Love to hear your thoughts. Thanks! -Bill

Yes, I pay estimated taxes. The CPA gives me the number to pay when she gives me the bad news for the current year. That said, I've also had big tax bill years because of property sales (without a 1031) which generated a huge capital gains bill.

We pay estimated taxes but depending on what happens in our rental lives it's not always on the nose. I've had to write some big checks before. It's not like a W-2 job where you pretty much KNOW what you make.

Yes but you can always pay a higher amount (or lower amount) ... just because the estimated taxes are $xxx doesn't mean you HAVE to pay that amount.

So if you end up realizing that you may pay more... just take that guess and put it in.

I read below was from the irs website. So it seems Wilma, to really win the game, you'd pay the smaller of the two below. However, I guess if you invest the money and do better than the 8% (or whatever it is) penalty, you can win that way too.

"In general, you may owe the penalty for 2023 if the total of your withholding and timely estimated tax payments didn't equal at least the smaller of:

1/ 90% of your 2023 tax, or

2/ 100% of your 2022 tax. Your 2022 tax return must cover a 12-month period.

We do estimated quarterly tax payments based on the past year’s taxes.

In late December, once rents are all collected and all rental bills have been paid, we run a year end report for the rentals.

We know our social security income, and we estimate our stock income.

We can then do an estimated tax return.

We adjust our 4th quarter tax payment based on our estimated return.

But, we also look at our tax bracket and our cash on hand. That lets us know how much of a Roth conversion we can do that year. This happens between Christmas and New Year’s Eve.

Wilma, I love that!

MMIT, interesting, what you said about “Our tax bracket is lower than where our kids are, so, it is cheaper for us to pay tax on the IRAs than have the kids pay tax on the inherited IRAs.” Something I hadn’t thought about but makes sense. And good tip on “look at our tax bracket and our cash on hand. That lets us know how much of a Roth conversion we can do that year” I got figure out how to do those Roth conversion. Right now I have other IRA’s so the pro-rata rules apply.

Busy, I love that term, “spitballing it”(hadn't heard it before)! They never were that accurate were they?

So I paid estimated tax for 2023 in January 2024 of more than 100% of 2022. So technically I don't need to pay more right now, right? Because I have no idea what 90% of 2023 will be unless we actually do our taxes...and we have filed for an extension so won't be actually doing them until September.

But am I supposed to start paying estimated tax for 2024?

Does anyone here know exactly how many places they will be selling or buying in any given year? If you do, I believe you are not growing your business to scale.

As for me, I got whacked hard when I did 12 transactions in a year. I have done more before and I have also done less, but the issue became did I fully complete a 1031 exchange?

There are some specific rules you have to follow in a 1031 exchange like the 200% rule in IDing properties. If you don't buy those properties, well then you will be doing a fractional 1031. You then get stuck with a smaller tax bill than if you did nothing.

So for example if you were going to have a tax bill of $20,000 on a single transaction, you bought only one of properties you IDed that account for 70% of the amount you sold and you didn't buy any other properties to expand the business, you would be tagged $6,000 tax bill in that transaction.

That happens. No big deal on a small deal.

Start doing transactions that have more zeros and the unexpected liability grows. To make things even worse, our tax structure is progressive. The more you make, the higher the percentage you pay on what you make. You can get your rear end handed to you quickly if you can't find replacement properties during the ID period.

I pay my estimated taxes. Do I know what tax bracket I'll be in any given year? Nope not at all. I know what one I want to be in but a five figure monthly net income doesn't support that bracket.

Yes. It hurts worse if you don't and have to pay interest and penelaty.

I do not pay (and have never paid) quarterly. My CPA does the normal stuff in April. Sometimes I owe more; sometimes I get a small refund. I write a check and I'm done with it.

That being said, after 17+ years of being a landlord, we finally sold our first property in December. (Which I'm writing the tax check for today.)

-John...