Large capital gain in 2017 from estate, set money aside in CD now?

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MisterBill
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Large capital gain in 2017 from estate, set money aside in CD now?

Post by MisterBill » Fri Feb 17, 2017 2:37 am

My wife's mother passed away a few years ago. She owned 50% of a NYC brownstone which was finally sold last year, at which point we received an $800k distribution for our share (we've gotten other distributions previously). The estate is going to pass thru the capital gains on the sale to the beneficiaries, but the estate tax year is not a calendar year, so I will not have to report it until my 2017 taxes.

We just got a new $200k distribution from the estate. My plan is to put it in a one year CD so I have it available to pay my taxes next year and I found a local bank offering a 1.42% interest rate, which beats anything I found online. Is this a reasonable idea? I won't get hit with a penalty if I don't make estimated tax payments on capital gains, will I (seems unlikely since I will not know the amount of capital gain until later this year)? Obviously I could just invest the $200k with the rest of my money (and potentially make more money that way, although obviously that is not guaranteed) and then worry about liquidating when I need to pay taxes next year, but I think I'd feel more comfortable keeping this money aside for the year.

Comments?

why3not
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Re: Large capital gain in 2017 from estate, set money aside in CD now?

Post by why3not » Fri Feb 17, 2017 6:16 am

MisterBill wrote: The estate is going to pass thru the capital gains on the sale to the beneficiaries, but the estate tax year is not a calendar year, so I will not have to report it until my 2017 taxes.?

Aren't you getting the stepped up basis of the property? How much did it increase in value since she passed?

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oldcomputerguy
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Re: Large capital gain in 2017 from estate, set money aside in CD now?

Post by oldcomputerguy » Fri Feb 17, 2017 6:20 am

MisterBill wrote:My wife's mother passed away a few years ago. She owned 50% of a NYC brownstone which was finally sold last year, at which point we received an $800k distribution for our share (we've gotten other distributions previously). The estate is going to pass thru the capital gains on the sale to the beneficiaries, but the estate tax year is not a calendar year, so I will not have to report it until my 2017 taxes.

We just got a new $200k distribution from the estate. My plan is to put it in a one year CD so I have it available to pay my taxes next year and I found a local bank offering a 1.42% interest rate, which beats anything I found online. Is this a reasonable idea? I won't get hit with a penalty if I don't make estimated tax payments on capital gains, will I (seems unlikely since I will not know the amount of capital gain until later this year)? Obviously I could just invest the $200k with the rest of my money (and potentially make more money that way, although obviously that is not guaranteed) and then worry about liquidating when I need to pay taxes next year, but I think I'd feel more comfortable keeping this money aside for the year.

Comments?


When DW's mother passed away a couple of years ago, we ended up with a 75k capital gain as part of the estate disbursement. (Since DW already owned the house her mom was living in, it was a disposition of asset rather than an inheritance, so no stepped-up basis here.) We simply set aside what we figured we'd need to pay the tax, then next tax time paid it. So far no fallout from Uncle Sam, and the CPA who did our taxes didn't flag it, so I assume all was done correctly.
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cherijoh
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Re: Large capital gain in 2017 from estate, set money aside in CD now?

Post by cherijoh » Fri Feb 17, 2017 7:42 am

MisterBill wrote: I won't get hit with a penalty if I don't make estimated tax payments on capital gains, will I (seems unlikely since I will not know the amount of capital gain until later this year)?


I'm not sure where you got the idea that you won't need to make estimated taxes on the capital gain. Obviously you can't make a payment in the 1st quarter for some as-yet-unknown gain later in the year, but you will be expected to make an estimated payment for the quarter in which you have the gain.

Prior to becoming a Boglehead, I had taxable investments in actively-managed mutual funds. I had several December "surprises" where the capital gains distributions were large enough to put me into penalty territory had I not made a 4th quarter estimated tax payment (due Jan 15). I didn't make estimated payments for any other quarters.

jebmke
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Re: Large capital gain in 2017 from estate, set money aside in CD now?

Post by jebmke » Fri Feb 17, 2017 7:46 am

cherijoh wrote:I'm not sure where you got the idea that you won't need to make estimated taxes on the capital gain. Obviously you can't make a payment in the 1st quarter for some as-yet-unknown gain later in the year, but you will be expected to make an estimated payment for the quarter in which you have the gain.

With a one-time income bump, a taxpayer may qualify under the safe harbor rule and not need to make an estimated payment to avoid a penalty.
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cherijoh
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Re: Large capital gain in 2017 from estate, set money aside in CD now?

Post by cherijoh » Fri Feb 17, 2017 8:03 am

jebmke wrote:
cherijoh wrote:I'm not sure where you got the idea that you won't need to make estimated taxes on the capital gain. Obviously you can't make a payment in the 1st quarter for some as-yet-unknown gain later in the year, but you will be expected to make an estimated payment for the quarter in which you have the gain.

With a one-time income bump, a taxpayer may qualify under the safe harbor rule and not need to make an estimated payment to avoid a penalty.


Very true - I should have thought to mention that. But I was primarily commenting on the fact that not knowing the amount in advance is NOT a justification for failing to file an estimated tax payment (as the OP seemed to think).

Also, the safe harbor rules don't work very well if there are a series of bumps in income in sequential years. You might not choose to have 100% (or 110% if income high enough) of your previous years taxes withheld if you had paid a lot of extra taxes in that previous year.

Gill
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Re: Large capital gain in 2017 from estate, set money aside in CD now?

Post by Gill » Fri Feb 17, 2017 8:46 am

Your post appears as if you are treating the entire distribution as taxable income.
Gill

cherijoh
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Re: Large capital gain in 2017 from estate, set money aside in CD now?

Post by cherijoh » Fri Feb 17, 2017 8:54 am

Gill wrote:Your post appears as if you are treating the entire distribution as taxable income.
Gill


There have been several posts by different people - to whom is your post directed? (FYI, in case you were not aware - you can quote a particular post by clicking on the quotation marks in the upper right hand side of a specific post).

MisterBill
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Re: Large capital gain in 2017 from estate, set money aside in CD now?

Post by MisterBill » Fri Feb 17, 2017 11:31 am

why3not wrote:
MisterBill wrote: The estate is going to pass thru the capital gains on the sale to the beneficiaries, but the estate tax year is not a calendar year, so I will not have to report it until my 2017 taxes.?

Aren't you getting the stepped up basis of the property? How much did it increase in value since she passed?


Gill wrote:Your post appears as if you are treating the entire distribution as taxable income.
Gill


I probably should have mentioned that the brownstone was an investment property, not her house. Her husband (who passed away 20+ years ago) purchased it with a partner many years ago (at least 30+) and it had apartments that the estate was still collecting rent on (I probably should have just called it an apartment building). As it was a partnership, the estate ended up owning 50% of the building, and my wife had 50% of that. Rather than changing the partnership, the estate held onto it until it was sold. They're still in the process of dissolving the partnership, from what I understand.

Anyway, that's why I am concerned about paying the capital gains. And while I don't have the exact figures to know what I will have to pay on, both the executor of the estate (brother in law) and the person who worked on the taxes at the law firm handling the estate said I needed to be prepared for a large amount on the K-1 that I get this year.

Gill
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Re: Large capital gain in 2017 from estate, set money aside in CD now?

Post by Gill » Fri Feb 17, 2017 8:18 pm

cherijoh wrote:
Gill wrote:Your post appears as if you are treating the entire distribution as taxable income. :happy
Gill


There have been several posts by different people - to whom is your post directed? (FYI, in case you were not aware - you can quote a particular post by clicking on the quotation marks in the upper right hand side of a specific post).

I'm referring to the OP. Also, thanks for the guidance on quoting a post. Did you notice I've been posting here for ten years, as have you? :D
Gill

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