He’ll Sell the Rental in June and Owe the IRS $90,000 in April. He’ll Send Them Exactly What He Paid Last Year, in Four Installments, and the Penalty on the Rest Will Be Zero
Selling a rental mid-year can trigger a massive tax bill, but the penalty calculation has nothing to do with the size of your gain. The answer lives in a single line on last year's return.
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The rental closes in June, the proceeds hit your account, and the next question follows right away: what do you send the IRS, and when? Say the sale adds $90,000 to your federal tax bill. The answer depends largely on last year’s return. The prior-year safe harbor for estimated taxes lets you pay what you owed last year in four equal installments. Do that, and the underpayment penalty on everything else is zero, even though the bulk of the bill doesn’t land until April.
Why a June Sale Can Cost You Even If You Pay in Full
Federal income tax works on a pay-as-you-go basis. The IRS checks it period by period, and it calculates the penalty separately for each payment period. IRS Publication 505 warns that you may be charged a penalty even if you are due a refund when you file. That penalty works like interest, and the IRS set the underpayment rate at 7% for the quarter that began October 1, 2026.
Last Year’s Tax Sets Your Safe Harbor Payment
The rule lives in 26 U.S. Code §6654(d)(1)(B). Your “required annual payment,” meaning the minimum you must prepay to avoid a penalty, is the lesser of 90% of the tax shown on this year’s return or 100% of the tax shown on last year’s return. If the adjusted gross income (AGI) on last year’s return exceeded $150,000, or $75,000 if you are married and file separately, the prior-year figure rises to 110%. Each installment equals 25% of that amount.
The prior-year route is usually easier. Last year’s number is already printed on your return. The 90% route forces you to estimate a 2026 liability that depends on a sale you may still be accounting for. Under the prior-year test, the size of this year’s gain plays no role at all. You can realize a huge gain, pay only the safe harbor amount during the year, settle the rest at the filing deadline, and owe no penalty.
Who Qualifies and Where People Slip
The prior-year option doesn’t apply if the preceding taxable year wasn’t 12 months or if you didn’t file a return for it. If you had no tax liability for 2025, were a U.S. citizen or resident alien all year, and had a 12-month tax year, you don’t have to pay estimated tax for 2026 at all.
The 110% trigger is easy to misread. The law looks at the adjusted gross income shown on the return for the preceding taxable year. Your 2025 AGI determines which percentage applies in 2026. The gain from a 2026 sale counts in 2026 AGI, so it can push you to 110% for 2027.
How to Set It Up
- Find the total tax on your 2025 Form 1040 and check your 2025 AGI against the threshold.
- Divide by four. Suppose last year’s total tax was $30,000 and your AGI stayed under the threshold. Each installment comes to $7,500.
- Pay by April 15, 2026, June 15, 2026, September 15, 2026, and January 15, 2027. The IRS credits payments in the order required, so a short early payment stays short even if you catch up later.
- Count withholding. Under §6654(g), tax withheld from wages is deemed paid evenly throughout the year unless you choose otherwise.
That last point applies if you’re reading this in October and three dates have already passed. Withholding from a retirement account distribution gets the same evenly-paid treatment no matter when it happens, which can fix a shortfall you discover late. We covered that technique in detail separately.
Where the Safe Harbor Stops Protecting You
The safe harbor wipes out the penalty and nothing else. You still owe the full balance by the April 2027 filing deadline. If you spend the proceeds, the safe harbor won’t help you. Setting aside the full estimated liability, beyond the safe harbor amount, covers the April balance. Keeping that cash in an interest-bearing account until April is one feature of this approach.
States write their own rules. For example, California requires installments of 30%, 40%, 0%, and 30%. If your current-year California AGI hits $1,000,000, you must base payments on 90% of your current-year tax. Check your own state’s rules separately.
There’s one more route: the annualized income installment method lets you report income received late in the year and pay accordingly. You’d use Schedule AI and file Form 2210 with your 2026 tax return. It means rebuilding your income period by period, which usually takes more work than just hitting last year’s number.
One Line and Four Dates
Find the total tax line on your 2025 Form 1040. Then put four dates on your calendar: April 15, June 15, September 15, and January 15 of the following year.
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David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
