IRS Exceptions to Reporting the Sale of Real Estate

Published 2012

Over the past eleven years, I have represented sellers of real estate in Virginia and have provided sound legal guidance and assistance with their varying needs.  In my representation of two individual clients recently, I have encountered two different title agencies who (both) were unfamiliar with the IRS regulations on which real estate transactions are exempt from reporting on a 1099-S.  Subsequently, I am now of the opinion that sellers of real estate should hire only attorneys, and they should insist that their attorneys be the reporting agent  for the sale to the IRS on a 1099-S, when required.  This is discussed below.

The settlement agent for a transaction is listed on the HUD*.  As they are RESA** (Virginia) and RESPA*** certified, they are the responsible reporting entity, or filer to the IRS.  There can be a written designation agreement naming another person designated in the agreement as the person responsible to file.  

As a real estate attorney who represents sellers in these transactions, I have read the IRS requirements and am able to inform my clients as to whether they will receive a 1099-S from the settlement agent.  When the settlement agent fails to report on a 1099-S to a seller (who is required to report the transaction to the IRS), the seller is not off the hook with the IRS.  The settlement agent really has no fiduciary duty to the seller in the transition or to a purchaser in the transaction, either.  An attorney who is not a settlement agent (and has no other legal conflicts with a title agency, a lender, a financial institution, or the seller) is the only person who can truly represent a purchaser or seller in real estate transaction.  Purchasers and sellers should hire an attorney and not rely solely on a title company to represent their interests.

If the sellers of real estate are EXEMPT from reporting their sale on a 1099-S, then they provide a Certification of No Reporting to the settlement agent.  This certification of exception is signed under penalty of law by the seller.  The IRS explicitly allows the reporting filer to rely on that signed certification, and not report an exempt transaction and to NOT file a 1099-S in the seller’s name.

Some settlement agents are in need of a review of the obligations on reporting transactions under the 1099-S rules.  This review can conveniently be found on the IRS 1099-S Instructions form.

I have taken an excerpt from the IRS Instructions which states the exception:

Exceptions 

 The following is a list of transactions that are not reportable:

     1. Sale or exchange of a residence (including stock in a cooperative housing corporation) for:

• $250,000 or less if that such residence is the principal residence (within the meaning of section 121) of the seller and the full amount of the gain on such sale is excludable from gross income under section 121.
• If the seller is married, the sale may be $500,000 or less.
• If there are joint sellers, you must obtain a certification from each seller (whether married or not) or file Form 1099-S for any seller who does not make the certification.  The certification must be signed by each seller under penalties of perjury.  You may get the certification any time on or before February 15 of the year after the year of sale.  You may rely on the certification and not file or furnish Form 1099-S unless you know that any assurance on the certification is incorrect.  You must keep the certification for 4 years after the year of sale.  You may keep the certification on paper, microfilm, microfiche, or in an electronic storage system.  You are not required to obtain the certification.  However, if you do not obtain it, you must file and furnish Form 1099-S.
  

 A title agent is required to provide the seller with either a Form W-9 or an alternate form soliciting the sellers' SSNs, prior to the closing.  These days, most consumers are hesitant to share their social security number.  Since a title agency has a high traffic volume, with many people in and out of the office each day with no fiduciary duty to the sellers, it is better to keep the confidential information in the office of the seller's attorney.

Going forward, it is my recommendation that every attorney that represents a seller when only a title agent is the settlement agent designate themselves as the reporting agent for the IRS and have that in a written agreement.  

*HUD: Federal Urban Housing and Development.  The HUD-1 Settlement Statement is a standard form required by the Federal government when financing a purchase or refinancing a residence. The settlement agent uses it to itemize services and fees charged to the borrower in the transaction.

**RESA: Virginia Real Estate Settlement Agents Act, formerly the Virginia Consumer Real Estate Settlement Protection Act

***RESPA: Federal Real Estate Settlement Procedures Act

Exceptions

 The following is a list of transactions that are not reportable:

     1. Sale or exchange of a residence (including stock in a

         cooperative housing corporation) for:

·         $250,000 or less if that such residence is the principal residence (within the meaning of section 121) of the seller and the full amount of the gain on such sale is excludable from gross income under section 121.

·         If the seller is married, the sale may be $500,000 or less.

·         If there are joint sellers, you must obtain a certification from each seller (whether married or not) or file Form 1099-S for any seller who does not make the certification. The certification must be signed by each seller under penalties of perjury.  You may get the certification any time on or before February 15 of the year after the year of sale. You may rely on the certification and not file or furnish Form 1099-S unless you know that any assurance on the certification incorrect. You must keep the certification for 4 years after the year of sale. You may keep the certification on paper, microfilm, microfiche, or in an electronic storage system. You are not required to obtain the certification. However, if you do not obtain it, you must file and furnish Form 1099-S.