| I. General Summary
The sale of real or personal property may generate federal and/or state tax liabilities for a seller. Generally, the seller will need to compare the “basis” of the property in light of the sales price in order to determine whether there is a potential “capital gain” or “capital loss” under the tax code. Fortunately, the IRS allows the great majority of homeowners to treat the sale of a principal residence as a “tax-free” event, regardless of whether any portion of the proceeds from the sale are reinvested into a new home.
II. Reporting Requirements
Each seller should be asked by the closer to complete an IRS Form 1099 Certification, which is an effort by the IRS to receive notice that a seller may have a potential tax liability or information to report in relation to the sale. The questions asked on this form relate only to whether the title agency is required to file an electronic “IRS Form 1099-S”, not whether tax is owed for the sale.
III. FORM 1099 Certification
If any of the following questions are not “true” for each seller, the title agency will file an electronic Form 1099-S and each seller will need to seek competent tax advice prior to filing their tax return. The questions can be summarized, as follows:
Q: The property served as the seller(s) principal residence for a period of 2 out of the last 5 years? ( T / F )
Q: The sellers have not sold another principal residence in the past 2 years? ( T / F )
Q: The sellers did not use the property for “business” or “rental” purposes? ( T / F )
Q: The sales price was (i) $250,000 or less for an unmarried owner, or (ii) $500,000 or less for a married couple who will file a joint return? ( T \ F )
“Principal residence” will be determined based upon the “ownership & use test”, which relates to factors such as (a) the amount of time spent living in the home, (b) employment location, (c) the address listed on bills, tax returns, driver’s license, voter registration, and (d) the location of banks, recreation clubs, and religious organizations frequented by the owners.
Special Considerations: There are many circumstances [examples include work-related moves, death of a spouse, health issues for you or a family member, divorce, extended duty military service, receipt of a “first-time” homebuyer credit, ownership of multiple tracts of land, natural disasters, and many other “unforeseen circumstances”] that may require additional tax guidance in order to identify, minimize or exclude the tax liabilities associated from the sale of a principal residence.
IV. FORM 1099-S Contents
If each seller fails to certify all statements in Section III as “true”, the title agency will file an electronic Form 1099-S at the end of the tax year, which includes each seller’s (a) name and mailing address, (b) description of the property sold, (c) closing date, and (d) gross proceeds (sales price). Each seller must provide written instructions if the sales price is to be allocated or “split” between sellers.