If you’ve ever purchased or sold a house, an acreage, or real property of any kind, you know that you will sit down with a notary and sign until your hand hurts. And for all you know, you could be signing away your life or your firstborn child, as quickly as you end up signing most of those documents. If you have a lawyer in the room with you, he or she should explain what you are signing, but it’s still possible that you will stop listening after document number 5,451 and nod as though you really do understand and care.
As a seller, though, you should be aware that some of the documents you sign may have consequences next April when your taxes come due. The IRS requires closing agents to report on the sale of real estate in case you owe any taxes on gains from the sale. Your closing agent, who may be a lawyer, a title company representative, or someone else, is required to submit IRS Form 1099-S to report the sale or exchange of real estate.
According to the IRS, sales of the following must be reported for income tax purposes:
- Improved or unimproved land, including air space;
- Inherently permanent structure, including any residential, commercial, or industrial building
- A condominium unit and its appurtenant fixtures and common elements, including land; and
- Stock in a cooperative housing corporation (as defined in section 216)
Many home sales, however, are exempt from reporting. Pay attention to these guidelines, because a legal exemption will save you as a homeowner from having to pay taxes on the sale of your home. To be eligible for exemption from the 1099-S filing requirements, you must submit an acceptable written assurance (certification) to the closing agent responsible for filing the 1099-S (often the buyer’s attorney). Your attorney or closing agent should provide you with a form certification to avoid the 1099-S filing requirements if you are eligible.
The IRS gives examples of a sample certification in Revenue Procedure 2007-12, 2007-4 I.R.B. 354. Among other factors, you will need to certify that
- You owned and used the residence as your 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.
- You have not sold or exchanged another principal residence during the 2-year period ending on the date of the sale or exchange of the residence.
- You (or your spouse or former spouse, if you were married at any time during the period beginning after May 6, 1997, and ending today) have not used any portion of the residence for business or rental purposes after May 6, 1997.
- At least one of the following three statements applies:
- The sale or exchange is of the entire residence for $250,000 or less.
- OR
- You are 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
- You are married, the sale or exchange is of the entire residence for $500,000 or less, and (a) you intend to file a joint return for the year of the sale or exchange, (b) your 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) your 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 principal residence.
- During the 5-year period ending on the date of the sale or exchange of the residence, you did not acquire the residence in an exchange to which section 1031 of the Internal Revenue Code applied.
