Estimated Tax on Capital Gains: How to Pay on a Big Sale Without a Penalty

Why a sale creates an estimated tax problem

Wages have tax withheld every payday. A closing statement does not: the title company wires your net proceeds, and the federal government gets nothing until you pay it. (The exception is a foreign seller of U.S. real estate, where the buyer withholds 15% of the amount realized under IRC 1445.) The tax system is pay as you go, so IRC 6654 charges an addition to tax, effectively interest, on each quarterly installment that was due and not paid.

The amounts are large. In our California example the sale adds $412,347 of federal income tax, $76,000 of net investment income tax and $236,339 of California tax. The same sale for a Texas couple adds $488,347 in total, all federal. Neither salary withholding nor a normal year's estimates come close to covering that.

The three ways to owe no penalty

You owe no federal underpayment penalty for a quarter if your withholding and timely estimates by that date cover the required installment, which is the smaller of these (IRC 6654(d)(1); Form 2210 instructions, 2025):

• 90% of this year's tax, paid in four equal parts (IRC 6654(d)(1)(B)(i)). In a sale year this is the expensive option, because this year's tax includes the gain.
• 100% of last year's tax, raised to 110% when last year's AGI was over $150,000 ($75,000 married filing separately). For most sellers this is the anchor: it is a known number on a filed return (IRC 6654(d)(1)(C)).
• The annualized amount under IRC 6654(d)(2), based on income actually earned through each period. This is what helps when the sale closes late.

A simple plan using the prior-year rule: suppose last year's total tax was $90,000 and AGI exceeded $150,000 (an assumption for illustration). Paying 110%, or $99,000, in four installments of $24,750 means no federal penalty regardless of how big the sale is, and the rest is due by April 15, 2027. You also owe no penalty if the balance due after withholding is under $1,000.

Late-year sale: the annualized income installment method

If the sale closes in the fourth quarter, the gain did not exist when the April, June and September installments were due. The annualized method on Form 2210 Schedule AI measures income through March 31, May 31, August 31 and December 31, multiplies it by annualization factors of 4, 2.4, 1.5 and 1, and sets each required installment from that (IRS Publication 505, 2026). A November gain falls only in the last period, so it drives only the January 15, 2027 installment.

Two cautions. First, you must file Form 2210 with Schedule AI to claim it; the IRS will not apply it automatically. Second, the method cuts both ways: a sale that closes in February loads the first period with the whole gain, and the annualized April installment can be higher than the regular one. For an early-year sale the 110% prior-year route (IRC 6654(d)(1)(C)) is usually cheaper. If you can choose the closing date, the year-end timing analysis shows how a December or January closing changes both the tax year and the estimate schedule.

Withholding counts as paid evenly

Under IRC 6654(g), income tax withheld is treated as paid in equal parts on each due date, unless you elect to use the actual dates. Estimated payments, by contrast, count only when made. That makes extra withholding a useful repair tool: if a quarter was missed, raising salary withholding for the rest of the year (a new Form W-4) can cover earlier shortfalls, because December withholding is spread back over April, June and September.

Retirees sometimes do the same with tax withheld from a retirement plan distribution. That makes sense only if the distribution itself fits the plan, since it adds ordinary income in the same year as the gain and can trip the thresholds covered on the big sale year phase-outs page.

For a fourth-quarter shortfall the penalty is interest at the underpayment rate, 7% a year for October to December 2026 (IRS quarterly interest rates). As a rough illustration, $300,000 paid three months late at 7% costs about $5,250. Not ruinous, but avoidable with one well-timed payment.

State estimates and real estate withholding

States run their own systems, and they do not all mirror the federal one. California is the strictest for big sellers:

• Uneven schedule: California installments are 30%, 40%, 0% and 30% of the required annual payment, so nothing is due in September (FTB 2026 Form 540-ES instructions).
• No prior-year shelter at $1 million: if 2026 California AGI is $1,000,000 or more ($500,000 married filing separately), estimates must be based on 2026 tax, not 2025 tax (FTB 2026 Form 540-ES instructions). In our example, the $236,339 of California tax must be paid on the current-year basis.
• Electronic payment: once you make an estimate or extension payment over $20,000, or file a return with tax over $80,000, all later California payments must be electronic (FTB 2026 Form 540-ES instructions).

California also requires the buyer or escrow to withhold 3 1/3% of the sales price on most sales of California real estate, reported on Form 593 (FTB 2026 Form 593 instructions). That withholding is credited against your California tax for the year, so check how much escrow actually sent before sizing the state estimate. Other states, including New York for nonresident sellers, collect estimated tax at closing; the state pages in our California capital gains guide and its siblings list each rule.

Installment sales spread the estimates too

With a Section 453 installment sale, gain is recognized as principal arrives, so the estimate follows the cash. In our seller-financed version, the 2027 year with $400,000 of recognized gain adds $115,105 of tax, a figure the couple can fund from the payments themselves. Three items still land in the year of sale: depreciation recapture, which IRC 453(i) recognizes up front even if no cash is received, any down payment, and gain on inventory. Interest on the note is ordinary income each year and belongs in the estimate as well.

Farm sellers have one more option. For a sale of qualified farmland to a qualified farmer, IRC 1062, added by P.L. 119-21, lets the seller elect to pay the tax attributable to the sale in four equal annual installments, and IRS Notice 2026-3 gives limited relief from the estimated tax penalty for that portion (Form 2210 instructions, 2025). See capital gains tax on farmland for the qualifying rules.

A practical checklist

1. Before closing, pull last year's total tax and AGI and compute the 110% prior-year amount (IRC 6654(d)(1)(C)).
2. Model this year's federal and state tax with and without the sale.
3. Decide between the regular and annualized methods based on the closing month.
4. Pay the federal installment through IRS Direct Pay or EFTPS and the state installment online, and keep confirmations.
5. If the January 15 installment is the big one, note that filing the full return and paying by January 31, 2027 replaces it (IRS Publication 505, 2026).
6. Set aside cash for the balance due April 15, 2027.

Get the Big Sale Tax Analysis for a year-by-year tax and payment schedule for each exit path.

Run your own numbers

Frequently asked questions