Getting your tax paperwork in order each year can be a challenge, especially if your holdings are quite diversified. You’ve probably heard of the IRS Form 1099 before, but there are actually twenty different types of 1099s, and most will not be applicable to your situation.
These various iterations of Form 1099 are used to detail any and all non-employment income you may have received during the tax year, and a 1099-S is specifically to ensure that the full amount of capital gains from the sale or exchange of real estate and property is accurately reported. This includes air space, structures, condominiums, co-ops, and even timber fields.
If you have a few questions, keep reading — here’s exactly what you need to know about IRS Form 1099-S, also known as “Proceeds from Real Estate Transactions.”
Who Should File?
If you’ve had any involvement with buying or selling property during the tax period, you’ll either issue or receive a 1099-S. Federal tax law requires that lenders or real estate agents file this form in the event of these occurrences:
- The sale of your primary residence, timeshare, or vacation home
- Making money from inherited real estate
- Income from investment property
- Selling business or rental property
Every transaction must have proper reporting and documentation through this form as well as its frequent filing companions, Form 8949, Form 4797, and Schedule D. It’s also important to note that Form 1099-S has a submission deadline of March 31st, before the traditional tax day.
If a real estate attorney is part of your team, they can also help guide you through the sales and reporting process to ensure you stay on the good side of the IRS.
As with pretty much every IRS form, there are exceptions. A rather large one for the 1099-S is that it’s not required if the seller certifies the sale is for their principal residence, and the sale price is less than $250,000. There are six major criteria to meet for the 1099-S Exemption Certification Form, including receiving a deed in lieu of foreclosure, refinancing, or a gift transaction.
If you’ve owned and lived on the property for two years or more before selling it, you may be exempt — but if you have received a Form 1099-S, the gains must be reported regardless. However, it’s always better to be safe than sorry when it comes to taxes, so when in doubt, you should consult an industry professional or CPA.
What Documentation Will I Need?
IRS Form 1099-S includes all of the usual questions to confirm the identities of both the buyer and the property seller. The form also requests some additional information, such as:
- Date of closing
- Gross proceeds
- Property address
- Real estate tax amount
- Additional information if the transferor is a trust, estate, or foreign entity
You’ll receive all of the information you need to complete the form during the closing process. If you’re not exempt from filing, expect to submit it with the rest of your tax return paperwork. While you can request an extension, failure to file will result in increasingly harsh IRS penalties the longer you delay.
Tax Treatment of Different Transactions
As mentioned above, if you’ve owned and lived in your home for two of the five years preceding the sale, then up to $250K of the profit is tax-free — and that amount doubles to $500K if you’re married and filing a joint return.
When you inherit property, the rules are slightly different. While the previous owner of the house might have built up equity and made a profit after the sale that was subject to capital gains tax, the IRS resets the value of the property to current market rates after an inheritance event. Since you aren’t making a capital gain, you will not be responsible for those fees if you sell immediately. In other countries, death and inheritance taxes can be quite onerous, but in the US it’s rare for heirs to pay significant taxes in this situation.
Owning a rental property can give you financial security and plenty of passive income, but when it comes time to sell, you’ll need to have a strategy in place to avoid taking a big tax hit. Some experts recommend a move called “tax-loss harvesting,” where you can reduce your tax exposure by balancing this profit against an investment loss. You can also leverage Section 1031, which permits you to defer capital gains taxes by reinvesting in more property.
What If I Didn’t Get One?
In certain cases, you may not receive a Form 1099-S after selling your home. It’s crucial that you check with your closing company to make sure that your paperwork is completely in order. Even if you think you qualify for an exemption from capital gains taxes, doing your due diligence where IRS forms are concerned is always a smart move. Ask your tax pro if you have any questions or concerns.
The Bottom Line
There are many moving parts and a nearly endless array of forms to be completed during the complex closing process. Your title company plays a vital role during this major life event, and the experts at Landtrust Title can answer any questions you might have about IRS Form 1099-S, as well as other crucial closing services like title clearance and transferring funds.
We offer individualized support, in-depth local knowledge, and equitable accessibility to all of our valued clients. If you’re ready to take the next step towards buying or selling your home, reach out to us today!