Form 1098-S: Proceeds From Real Estate Transactions

Form 1099-S, Proceeds From Real Estate Transactions, is an information return used by the Internal Revenue Service to document the proceeds from the sale or exchange of real estate. Its function is to ensure that sellers of property correctly report the transaction on their income tax returns. The form provides a record of the gross amount received by the seller, which serves as a starting point for calculating any potential capital gain or loss.

A copy of the form is sent to the seller of the property and filed with the IRS. It applies to a wide range of real estate transfers, including the sale of land, residential homes, commercial buildings, and shares in a cooperative housing corporation.

Understanding the Information on Form 1099-S

At the top of Form 1099-S, you will find identifying information for both the filer and the seller, referred to as the “transferor.” The filer is the entity responsible for reporting the transaction, while the transferor is the individual or entity selling the property. This section includes names, addresses, and Taxpayer Identification Numbers (TINs) for both parties, ensuring the transaction is correctly attributed for tax purposes.

Box 1 of the form shows the “Date of Closing,” which is the date that legal title to the property is transferred from the seller to the buyer. This date is important as it determines the tax year in which the sale must be reported.

The figure in Box 2, “Gross Proceeds,” represents the total contract sales price of the property. The gross proceeds figure is not reduced by any selling expenses, such as real estate commissions, closing costs, or legal fees. It includes cash received, the principal amount of any notes the seller accepts, and any of the seller’s existing mortgages that are paid off at settlement.

Box 3 provides the “Address or Legal Description” of the property that was sold. The form also includes a box that must be checked if the seller received or will receive property or services as part of the exchange, as this represents non-cash proceeds that still have value for tax purposes.

Who Files and Receives the Form

The responsibility for filing Form 1099-S with the IRS and providing a copy to the seller falls to the person responsible for closing the transaction. In most cases, this is the settlement agent, who may be an attorney, a title company representative, or an escrow agent. When a standard Closing Disclosure form is used, the settlement agent listed on that document is the one required to file Form 1099-S.

If there is no designated settlement agent, the responsibility shifts to the mortgage lender, the seller’s broker, the buyer’s broker, or the buyer, in that order. The parties to a transaction can also sign a written designation agreement to specify who will take on the filing duty, which can be useful in complex transactions.

A seller might not receive a Form 1099-S in certain situations. The most common reason is the sale of a principal residence where the seller meets specific criteria for excluding the gain from income. If the gross proceeds are $250,000 or less ($500,000 for married couples filing jointly) and the seller provides written certification that the full gain on the sale is excludable from gross income, the settlement agent is not required to file the form.

Using Form 1099-S on Your Tax Return

When preparing your tax return, the “Gross Proceeds” amount from Box 2 of Form 1099-S is the sales price for the property. This figure must be reported on Form 8949, Sales and Other Dispositions of Capital Assets, which is used to detail each capital asset transaction.

The next step involves calculating your actual gain or loss. To do this, you must determine your property’s adjusted cost basis. The basis starts with the original purchase price and is increased by the cost of any significant improvements you made. It is then reduced by any depreciation you may have claimed, for instance, if you used part of your home for business or rented it out. Subtracting this adjusted basis from the gross proceeds reported on Form 1099-S will yield your capital gain or loss.

After completing Form 8949 for all capital asset sales during the year, the totals are transferred to Schedule D, Capital Gains and Losses. This schedule consolidates your gains and losses to calculate your net capital gain or loss for the year. The final figure from Schedule D is then carried over to your main tax form, Form 1040, where it contributes to your total taxable income.