January 2011 Vol. 4, No. 1
 

Underwriters' Bulletin

Procedural Updates

1099 Real Estate Tax Reporting

When an individual or entity earns income, under federal tax law, that income must be reported to the Internal Revenue Service (IRS) so that the government can verify what, if any, income tax is owed. In the case of sales of real estate, the settlement agent (closer) must report to the IRS the seller's income from the sale. However, there is an exception to this requirement. The exception applies when the property is the seller's principal residence and the seller can meet all of following criteria:

  1. The seller must have owned and used the property as his or her principal residence for two or more years during the five-year period immediately preceding the sale or exchange;
  2. Excluding sales before May 7, 1997, the seller must not have sold or exchanged another principal residence during the two-year period immediately preceding the sale or exchange;
  3. Since May 6, 1997, no portion of the residence may have been used for business or rental purposes by the seller or the seller's spouse; and
  4. At least one of the following statements must be true:
    1. The sale or exchange of the entire residence is for $250,000 or less;
    2. The seller is married, and the sale or exchange is for $500,000 or less, and the gain is $250,000 or less; or
    3. The seller is married, the sale or exchange is for $500,000 or less, and
      1. Seller intends to file a joint return for the year of sale or exchange; and
      2. Conditions #1 and #2, above, apply to seller's spouse.

ATG has a form to help determine whether the above criteria is met, called the Certification for No Information Reporting on the Sale or Exchange of a Principal Residence, ATG Form 3026. This form will provide the closer with information to determine whether the closer must report the seller's income from the sale to the IRS. The closer will not report the sales amount to the IRS if all of the following are true:

  1. Each seller individually completes a separate copy of ATG's form. This means that a husband and wife must each fill out separate forms.
  2. Each seller's answers provided on the form qualify under the IRS's reporting criteria. This means that the seller truly answers each statement on the form as "Yes." When completing the form, the assurances should be answered as though each one were prefaced with this statement: "Is it true, yes or no, that...." By reading the assurances in this manner, they become less confusing.

If any of the sellers either do not complete a separate form, or do not provide qualifying answers, then the closer must file a 1099-S form to report the income from sale to the IRS for the sellers without qualifying forms.

If a 1099-S form is filed with the IRS, then that does not mean that the sellers are guaranteed to pay tax on the income. The form provides income information only. Whether that income is taxable depends upon a number of other facts set forth in the Internal Revenue Code, and not all reported sales are taxable. Because a transaction that is not taxable may still be reportable, the closer may need to request information from the parties to determine the closer's liability for reporting the transaction to the IRS. If you have any questions about the use of this form, please contact the Underwriting Department,legal@atgf.com, 217.403.0020, or 312.752.1990.

© ATG|Casenotes/Bulletin 1101_v4n1

[Last update: 1-21-11]

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