Sale or Exchange of Real Estate
A 1099-S form, “Proceeds from Real Estate Transactions,” is used in the United States to report the sale or exchange of real estate to the Internal Revenue Service (IRS). This form is part of the 1099 series, which are used to report various types of income that individuals may receive throughout the year other than salary from an employer. The responsibility to file a 1099-S form typically falls on the “person responsible for closing the transaction.” This form is part of the 1099 series, which are used to report various types of income that individuals may receive throughout the year other than salary from an employer. It is an essential document for tax reporting purposes, ensuring that interest income is correctly reported to the IRS.
Per the IRS, use Form 1099-S to report the sale or exchange of real estate.
- Why do you need to file a 1099-S?
- Who Needs to File a 1099-S?
- Are there any exemptions to filing a 1099-S?
- What is the deadline for filing a 1099-S?
- What is required to file a 1099-S?
- What are the penalties for 1099-S?
- Do you need to e-file a 1099-S?
- Is state filing required for the 1099-S?
- What elements make up a 1099-S form?
- Can you correct a 1099-S?
Why do you need to file a 1099-S?
The 1099-S form is used to report the sale or exchange of real estate transactions to the IRS. The need to file this form arises from the following reasons:
IRS Reporting Requirement
- Just like other 1099 forms, the 1099-S provides the IRS with information about transactions that may result in taxable income for individuals. By requiring reporting on the sale or exchange of real estate, the IRS can track and ensure the appropriate taxation of any capital gains realized from these transactions.
- The sale or exchange of real estate can result in a capital gain or loss for the seller. By filing a 1099-S, the gross proceeds from the sale are documented. This doesn’t represent the taxable amount but is an essential starting point. The taxpayer will determine the capital gain or loss by considering the property’s cost basis and associated selling expenses.
Accountability and Transparency
- The 1099-S ensures that real estate transactions are transparent. It discourages potential tax evasion or underreporting by creating a paper trail of these transactions.
Primary Residence Exclusion
- While many homeowners may qualify for an exclusion on the capital gains from the sale of a primary residence (up to $250,000 for individuals or $500,000 for married couples filing jointly under Section 121, provided certain conditions are met), the IRS still needs a record of these transactions. Some qualifying sales might not receive a 1099-S due to this exclusion, but if they do, it’s essential to report the transaction correctly and claim the exclusion on the tax return.
- The entity responsible for closing the transaction, such as a title or escrow company, might face penalties from the IRS for failing to file the required 1099-S forms.
It’s important for both the issuer of the 1099-S (often the settlement agent) and the recipient (typically the seller) to understand the implications of the form. The seller, upon receiving the form, should ensure the transaction is correctly reported on their tax return.
Who needs to file a 1099-S?
The responsibility to file a 1099-S form typically falls on the “person responsible for closing the transaction.” This usually refers to the settlement agent involved in the real estate transaction. Here’s a breakdown of who typically needs to file a 1099-S:
- Often, this is a title company, escrow service, or other entity that handles the final stages of a real estate transaction. They prepare closing documents, handle the exchange of funds, and ensure that all conditions are met before the sale is finalized.
- In situations where no settlement agent is involved (which is less common), the transferee (or buyer) or their attorney may be required to file the 1099-S.
- If an attorney is acting on behalf of the seller and receives the sale proceeds, that attorney may be responsible for filing the 1099-S.
- In certain real estate transactions that are more informal and don’t involve typical settlement agents or transferees in the traditional sense, the individual seller might need to manage the reporting requirements associated with the 1099-S, although this situation is relatively rare.
The entity or individual responsible for filing the 1099-S should issue a copy to the IRS and provide a copy to the seller of the property. This helps the seller be aware of any reporting obligations on their tax return related to the sale.
Are there any exemptions to filing a 1099-S?
Yes, there are certain situations where a 1099-S does not need to be filed, even when a real estate transaction has taken place. Here are some of the common exemptions:
Primary Residence Exclusion
- If the seller qualifies for the full Section 121 exclusion (which allows for the exclusion of up to $250,000 of gain for a single taxpayer, or $500,000 for a married couple filing jointly from the sale of a primary residence), and the settlement agent receives a written assurance from the seller that the full gain is excludable, then a 1099-S does not need to be filed.
- Transactions with a sales price that doesn’t exceed $250,000 for a residence (single-family dwelling) or $500,000 for a married couple do not typically require a 1099-S, assuming the seller provides the required written assurance that the residence was their principal residence and they meet the ownership and use tests.
Transfer of Property to a Government Agency
- Sales or exchanges of property (involuntary conversions) to a federal, state, or local government or any of their agencies are generally exempt.
Foreclosures and Repossessions
- In certain situations, foreclosure or repossession might not require a 1099-S, although other reporting might be necessary (like a 1099-A for abandoned property).
Property Sales by Corporations
- The sale or exchange of property by a corporation, provided the corporation has class of stock traded on an established securities market.
Property Sales by Non-Profits
- The sale or exchange of property by an exempt volume transferor. This typically pertains to entities like nonprofits.
Certain Agricultural Transactions
- Some agricultural transactions, like those of standing timber, have different reporting requirements and might not necessitate a 1099-S.
Transfer of Property with No Monetary Consideration
- Transactions with zero gross proceeds (e.g., gifting a property) generally don’t require a 1099-S.
Remember, even if a 1099-S is not required due to one of these exemptions, the transaction might still have tax implications. For instance, the sale of a primary residence might exceed the Section 121 exclusion limits, or there could be depreciation recapture on a rental property.
What is the deadline for filing a 1099-S?
The deadline for filing a 1099-S can vary based on the several factors:
Sending to Recipients
- The 1099-S form should be furnished to the recipient by January 31 of the year following the payment year.
Filing with the IRS
- If you are filing on paper, the 1099-S forms should be submitted to the IRS by February 28 (or the last day of February) of the year following the payment year.
- If you are filing electronically, the deadline extends to March 31 of the year following the payment year.
However, if any of these dates fall on a weekend or a holiday, the deadline may be extended to the next business day. Additionally, if you discover an error after the initial filing, there are separate deadlines for corrected 1099-S forms.
Remember, missing these deadlines can result in penalties, so it’s crucial to stay informed and act timely.
What is required to file a 1099-S?
To file a Form 1099-S, you will need certain information about both the payer (the person or business making the payment) and the recipient (the person or business receiving the payment). Here’s what is required to file a 1099-S:
Information about the Payer (Filer)
- Payer’s Name and Address
- Provide your legal business name and mailing address.
- Payer’s Taxpayer Identification Number (TIN)
- This could be your Employer Identification Number (EIN) or your Social Security Number (SSN), depending on your business structure. If you’re a sole proprietor, you might use your SSN; if you’re a business entity, you’d use your EIN.
- Payer’s Phone Number
- Include a phone number where the payer can be reached.
Information about the Recipient (Transferor)
- Recipient’s Name and Address
- Provide the legal name and mailing address of the individual or business receiving the payment.
- Recipient’s Taxpayer Identification Number (TIN)
- This could be the recipient’s Social Security Number (SSN) if an individual or their Employer Identification Number (EIN) if a business entity.
Form specific information
- Box 1 – Date of closing
- Box 2 – Gross proceeds
- Box 3a – Address line 1
What are the penalties for 1099-S?
Please see the penalties section for details.
Do you need to e-file a 1099-S?
Please see the e-file section for details.
Is state filing required for the 1099-S?
Currently, the 1099-S form does not have a place to enter state information.
What elements make up a 1099-S form?
The 1099-S contains several boxes, each designed to report specific types of income or information. Here is a breakdown of the boxes on the 1099-S:
- Box 1 – Date of closing
- Enter the closing date. On a Closing Disclosure, the closing date is the Closing Disclosure date. If a Closing Disclosure is not used, the closing date is the earlier of the date title transfers or the date the economic burdens and benefits of ownership shift to the transferee.
- Box 2 – Gross proceeds
- Enter the gross proceeds from the sale or exchange of real estate. Gross proceeds means any cash received or to be received for the real property by or on behalf of the transferor, including the stated principal amount of a note payable to or for the benefit of the transferor and including a note or mortgage paid off at settlement.
- Box 3 – Address line
- Enter the address of the property, including the city, state, and ZIP code. If the address does not sufficiently identify the property, also enter a legal description, such as section, lot, and block.
- Box 4 – The transferor received or will receive property or services as part of the consideration
- If the transferor received or will receive property (other than cash and consideration treated as cash in figuring gross proceeds) or services as part of the consideration for the property, enter an “X” in the checkbox in box 4.
- Box 5 – The transferor is a foreign person (nonresident alien, foreign partnership, foreign estate, or foreign trust)
- If the transferor is a foreign person (nonresident alien, foreign partnership, foreign estate, or foreign trust), enter an “X” in the checkbox in box 5.
- Box 6 – Buyer’s part of real estate tax
- For a real estate transaction involving a residence, enter the real estate tax paid in advance that is allocable to the buyer. You do not have to report an amount as allocable to the buyer for real estate taxes paid in arrears.
Remember, not all boxes will be filled out on every 1099-S form. Only the relevant boxes for the specific payments made will have amounts or indicators.
Can you correct a 1099-S?
Yes, you can correct a 1099-S. Please see the corrections and negations section for details.