"Does a Seller need to pay income tax on the difference between what they owe and what the Seller sells
The property for?" PLEASE consult your CPA or Tax Attorney. "Not disclosing it to the seller or the wrong answer could cause you a Law suite."
Here is an explanation of the two forms that escrow holder will send out to the sellers to have them complete and return. One is the Certifications of No Information Reporting and the other is the 1099-S form. The seller is to review both forms and complete the one that applies to him. Here is an example of both forms and a brief explanation for them. In the case of a shortpay transaction, escrow holder will only be reporting a 1099-S if it applies to the seller in the below situations. Escrow holder is only reporting what the actual sales price of the property was not how much the seller received as proceeds or how much debt was forgiven; however, the lender on the property may file their own 1099 for the shortage on the loan against the seller. It would be in any realtor's best interest to always advise their sellers in a shortpay situation, to contact their CPA or tax attorney to find out what tax consequences they may face.
1. Certification for No Information Reporting
Proceeds from real estate transactions must be reported to the IRS on the Form 1099-S.
Real Estate transactions include the sale or exchange of residential, commercial, agricultural, vacant land, multi-family, etc. We have in the past issued 1099-S on all sales/exchanges.
The laws pertaining to 1099-S reporting proceeds from real estate transactions were amended 1998. The Internal Revenue Service now allows for the use of a capital gains Certification in connection with the sale or exchange of certain residential property. Use of such a Certification eliminates the requirements that Form 1099-S be completed and filed with the IRS. This Certification now falls under "exceptions" in the 1099-S Reporting Regulations. The "exceptions" for "volume transferor" have not changed.
The IRS has set out specific guidelines for the use of the certification. Attached for your use is the Certification for No Information Reporting which conforms to the IRS requirements.
The Certification may be used as an alternative to Form 1099-S reporting for sales or exchanges of a principal residence where the sale price is $250,000 or less for a single person or $500,000 or less for a married person. The Certification must be in writing and signed by each seller, including spouses, under penalties of perjury. Each spouse must execute a separate Certification. If a seller answers false to any of the assurances listed in Part II of the Certification you must file a 1099-S.
In the Certification, the seller makes the following assurances:
- The seller has owned and used the principal residence for two of the last five years
- The seller has not owned or exchanged another principal residence during this two year period
- No portion of the residence has been used for business or rental purposes
- Stated sale price limitations have not been exceeded and/or capital gain and marital status requirements have been met
- They did not acquire the property within the last 5 years in a 1031 exchange
- The property was not acquired by gift and by 1031 exchange within the last 5 years
You should have either an appropriately completed and signed Certification or a 1099-S in your file.
Please remember never to offer advice as to which Form the seller/exchangor should complete. If they have questions, please refer them to seek the advice of their CPA and/or attorney and provide them with a copy of the 1099-S IRS Reporting Regulations. They can be easily obtained from the internet at http://www.irs.gov/.
2. 1099-S Form
Unless we receive certification that the particular transaction is exempt from reporting, the transferor must complete Substitute Form 1099-S.
The top portion of the form contains basic information about the transaction, including the Branch Address, Escrow Number, Locate Number, Date of Closing, and the Property Address and Assessors Parcel Number.
In situations where the transferor is an estate or trust, the name of the estate or trust should be entered on line 1. Optionally, the name of one executor or trustee may be entered on line 2. In all cases, however, the TIN of the estate or trust named on line 1 must be reported.
A deceased person's Social Security Number cannot be reported on a 1099-S form. In the event that one or more of the owners is deceased, the executor of the estate must obtain a Taxpayer Identification Number on behalf of the estate prior to closing. TINs for estates and trusts can be applied for at the IRS, either on the phone or through its web site at http://www.irs.gov/.
When the transferor is a Partnership or Limited Liability Company, the entity's Employee Identification Number should be used.
The PROCEEDS Section is used to report the total consideration and the gross proceeds allocated to this transferor.
If there is more than one transferor and they are not spouses, a separate form must be completed for each transferor. In this situation, you should request an allocation of proceeds at or before the closing. You can rely on the response of any of the transferors provided it is not contested.
If for whatever reason you cannot obtain an allocation, file a separate 1099-S for each transferor and report the total proceeds on each form.