It’s tiiiiime! Yep, it’s that time of year we all look forward to! No, I’m not talking about summer vacation. I’m talking about TAX time. As a title agent or attorney, you probably have April marked on your calendar for tax purposes. Well, if you don’t already, you should. As you know, title agents, attorneys, and escrow agents have reporting obligations to the IRS when they are responsible for a sale or transfer.
Having a system in place throughout the year will alleviate the tax time scramble. For example, requiring that the seller provide you with his or her social security number no later than at the closing table will alleviate the need to track that individual down later to obtain the necessary information. For any form you file with the IRS, you are required to submit a full identification number (social security number, tax identification, Employee identification, etc.). Likewise, you may want to save time later and provide the transferor with a copy of the 1099-S or an acceptable substitution at closing.
A quality title agent is prepared to fulfill their annual obligations to the IRS, but knowing exactly how the 1099 reporting works will also prepare title agents for the questions that a number of sellers will inevitably ask. Be prepared to answer these common 1099 questions:
What is a 1099 Anyway?
A 1099 is the form used by taxpayers to report certain types of income such as self-employment earnings, interest and dividends, or government payments. As for the proceeds that a seller nets from a real estate transaction, a 1099-S is used. A 1099-S is also used to report the sale or exchange of real estate.
For more information, please visit the IRS website.
Are Sale/Transfer Proceeds Taxed?
Sometimes proceeds are taxed and sometimes not. For anyone asking this question in the context of a particular transaction, defer to that seller’s tax professional. There is a distinction between proceeds that are reportable and those that are taxed. A tax professional can sift through a particular transaction to find deductions and other mechanisms to lessen the seller’s tax burden that you may not be aware of. As the title agent, stay in your lane of expertise – determining what transactions your company is obligated to report.
What Transactions are Reportable to the IRS?
The IRS operates under the initial presumption that ALL INCOME is reportable unless specifically exempt from reporting. So, if you find a $100 bill on the ground, it is technically considered income and you should report it as such unless, of course, it falls into an exempt category.
Similarly, the proceeds of a residential real estate transaction are presumed reportable unless the transferor can certify in writing and under penalty of perjury that the following statements are all true:
- The seller has owned and used the residence as her principal residence for an aggregate of at least 2 of the last 5 years.
- The seller has not sold or exchanged another principal residence in the last 2 years.
- No portion of the residence has been used for business or rental purposes after May 6, 1997.
- If unmarried: the sale of the residence is for $250,000 or less. If married (or widowed from a co-owner within two years of the sale), the sale is for $500,000 or less.
- The seller did not obtain this property in a 1031 exchange done in the last 5 years.
- If the seller is required to use the basis of a prior owner who acquired from a 1031 exchange, the 1031 exchange with the prior owner occurred over 5 years ago.
For non-residential sales or exchanges, the following types of property are also exempt from reporting: subsurface natural resources, burial plots, unaffixed manufactured homes that were manufactured off-site from the subject property.
As the responsible reporting party, you are required to keep this written exemption certification signed by the seller in your files for at least four years.
Some other miscellaneous exemptions from reporting include (1) transactions where the seller has sold at least 25 different pieces of real estate held in the course of business, to 25 different buyers in the last two years (“Exempt Volume Transferor”), (2) the transfer is in lieu of repayment of a debt that is secured by the subject property, (3) the transfer is not a sale or exchange for value, such as a donation or refinance; and (4) the transfer is for a value less than $600 (taking into account the value of “other good and valuable consideration”). For more instruction on the 1099, visit the IRS directly at https://www.irs.gov/instructions/i1099s.
This may go without saying but when in doubt, report it!
*As with any tax inquiries, leave the specifics of a particular situation to the tax experts. This article is not meant to provide tax advice, but rather an overview of IRS requirements imposed upon title agents, escrow agents, and attorneys involved in real estate transactions.
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