Closing Remarks Newsletter: 1099 Season Special Edition
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Hey! I’m exempt!
New year, same old misconception.
I was reminded recently that there are still some practitioners in our industry who believe that sales of residential property are “almost always” exempt from 1099-S reporting. I don’t know the origin of this but I’ve got to guess that it started with over zealous real estate agents trying to impress their clients by “instructing” the settlement agent that the “sale is exempt” and they shouldn’t send a 1099-S to the seller. It’s no doubt been perpetuated by settlement agents who don’t want to be bothered by the extra paperwork and take the easy way out by assuming the sale is exempt.
While it is true that a significant percentage of residential sales by owner/occupiers are exempt from 1099-S reporting requirements, the settlement agent should take extra care. At the table, the seller(s) should be asked to complete a form called CERTIFICATION FOR NO INFORMATION REPORTING ON THE SALE OR EXCHANGE OF A PRINCIPAL RESIDENCE. CLICK HERE to get a sample form.
As a general rule, the settlement agent is required to report to IRS 100% of the sales proceeds received by seller(s) pursuant to a real estate sale via Form 1099-S. However, IRS has stipulated the circumstances under which a settlement agent may rely on the assurances of the seller that the sale is exempt from 1099-S reporting. IRS Revenue Procedure 2007-12 (CLICK HERE for copy) describes in detail the seller assurances upon which a settlement agent could safely rely. The key point here is that the settlement agent is required to report unless the settlement agent chooses to rely upon the assurances by the seller(s). The certification form, described above, is an ideal vehicle by which to gather the seller assurances.
There are six key assurances:
(1) The seller owned and used the residence as the seller’s principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange of the residence.
(2) The seller has not sold or exchanged another principal residence during the 2-year period ending on the date of the sale or exchange of the residence.
(3) No portion of the residence has been used for business or rental purposes after May 6, 1997, by the seller (or by the seller’s spouse or former spouse, if the seller was married at any time after May 6, 1997).
(4) At least one of the following three statements applies:
The sale or exchange is of the entire residence for $250,000 or less.
OR
The seller is married, the sale or exchange is of the entire residence for $500,000 or less, and the gain on the sale or exchange of the entire residence is $250,000 or less.
OR
The seller is married, the sale or exchange is of the entire residence for $500,000 or less, and (a) the seller intends to file a joint return for the year of the sale or exchange, (b) the seller’s spouse also used the residence as his or her principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange of the residence, and (c) the seller’s spouse also has not sold or exchanged another principal residence during the 2-year period ending on the date of the sale or exchange of the residence.
(5) During the 5-year period ending on the date of the sale or exchange of the residence, the seller did not acquire the residence in an exchange to which section 1031 applied.
(6) In cases where the seller’s basis in the residence is determined by reference to the basis in the hands of a person who acquired the residence in an exchange to which section 1031 applied, the exchange to which section 1031 applied occurred more than 5 years prior to the date of the seller’s sale or exchange of the residence.
It is readily apparent that the sales price is key to determining whether a sale is exempt from 1099-S reporting but it is only part of the equation. There are other, some obscure, assurances to consider.
If the settlement agent chooses to accept the assurances by the seller, it is important that he or she have the seller complete the certification form with the appropriate answers to qualify for exemption and, the settlement agent must have confidence in the answers. Remember, it is the obligation of the settlement agent to report unless he/she accepts the assurances of the seller(s) that the transaction is exempt.
So, what do you do if you have reason to believe that the seller(s) assurances may not be accurate? What I would do is file the 1099-S with the IRS. I am not aware of anyone being penalized for filing a 1099-S on an exempt transaction. On the other hand, you may be penalized for failing to report a transaction that was not exempt. Even if you don’t have to pay a penalty, you may still have to provide documentation to the IRS that you believed that the transaction was exempt from reporting. Who wants to go through that?
Edwin G. Generes, CPA (Inactive)