If home sale proceeds are less than exemption, does any form need to be filed?

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swampwiz
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If home sale proceeds are less than exemption, does any form need to be filed?

Post by swampwiz »

This particular home is to be sold by a widow within 2 years of being widowed, and it was the home of her and her late husband for more than 2 years, and with no exclusions such as the home being used in a business, etc., so the $500K married filing jointly exclusion applies. The 1099 from the sale will be below this $500K. It seems that the IRS is saying that this 1099 would not require any entry in a form.

Presuming my assessment is accurate, this begs the question of what would prompt the IRS to determine if the sale ended up having a taxable gain. Is it something where this would only be caught as part of an audit?
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Duckie
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Re: If home sale proceeds are less than exemption, does any form need to be filed?

Post by Duckie »

swampwiz wrote: Mon Oct 18, 2021 6:45 pm This particular home is to be sold by a widow within 2 years of being widowed, and it was the home of her and her late husband for more than 2 years, and with no exclusions such as the home being used in a business, etc., so the $500K married filing jointly exclusion applies. The 1099 from the sale will be below this $500K. It seems that the IRS is saying that this 1099 would not require any entry in a form.

Presuming my assessment is accurate, this begs the question of what would prompt the IRS to determine if the sale ended up having a taxable gain. Is it something where this would only be caught as part of an audit?
Per Publication 523:
  • "Determine whether you need to report the gain from your home. You need to report the gain if ANY of the following is true.
    • You have taxable gain on your home sale (or on the residential portion of your property if you made separate calculations for home and business) and don’t qualify to exclude all of the gain.
    • You received a Form 1099-S. If so, you must report the sale on Form 8949 even if you have no taxable gain to report. See Instructions for Form 8949 and Instructions for Schedule D for more details.
    • You wish to report your gain as a taxable gain even though some or all of it is eligible for exclusion. You may wish to do this if, for example, you plan to sell another main home within the next 2 years and are likely to receive a larger gain from the sale of that property. If you choose to report, rather than exclude, your taxable gain, you can undo that choice by filing an amended return within 3 years of the due date of your return for the year of the sale, excluding extensions.
    If NONE of the three bullets above is true, you don’t need to report your home sale on your tax return. If you didn’t make separate home and business calculations on your property, skip to Reporting Deductions Related to Your Home Sale, later."
If she gets a 1099-S she has to report it.
secondcor521
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Re: If home sale proceeds are less than exemption, does any form need to be filed?

Post by secondcor521 »

Duckie's right. If she gets a 1099-S, she should report the sale on her tax return on Form 8949 with adjustment code H to exclude the gain.

If she gets a 1099-S and doesn't report the sale, I would bet the IRS computers would match things up and issue some sort of notice to her, probably wanting her to pay capital gains on the entire sales price. Which of course she wouldn't want to do.
Katietsu
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Re: If home sale proceeds are less than exemption, does any form need to be filed?

Post by Katietsu »

The person responsible for the closing, ie the settlement agent, would normally file the 1099-S with the IRS. If the sale proceeds will meet all the requirements to be excluded from income (Section 121 exclusion), then the seller should make the settlement agent aware. The agent should allow the seller to make such a certification and the agent should then be able to proceed without issuing a 1099-S.
123
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Re: If home sale proceeds are less than exemption, does any form need to be filed?

Post by 123 »

You can report the sale even if no 1099-S is issued/received and be done with it. I did this for an elderly relative that sold a home. Sometimes due to changes of address there can be uncertainty about whether a 1099-S was issued. And due to the large size and diverse training and procedures of some large escrow companies what you are told at settlement about 1099-S issuance may not be what actually occurs.
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Topic Author
swampwiz
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Re: If home sale proceeds are less than exemption, does any form need to be filed?

Post by swampwiz »

Duckie wrote: Mon Oct 18, 2021 8:48 pm
swampwiz wrote: Mon Oct 18, 2021 6:45 pm This particular home is to be sold by a widow within 2 years of being widowed, and it was the home of her and her late husband for more than 2 years, and with no exclusions such as the home being used in a business, etc., so the $500K married filing jointly exclusion applies. The 1099 from the sale will be below this $500K. It seems that the IRS is saying that this 1099 would not require any entry in a form.

Presuming my assessment is accurate, this begs the question of what would prompt the IRS to determine if the sale ended up having a taxable gain. Is it something where this would only be caught as part of an audit?
Per Publication 523:
  • "Determine whether you need to report the gain from your home. You need to report the gain if ANY of the following is true.
    • You have taxable gain on your home sale (or on the residential portion of your property if you made separate calculations for home and business) and don’t qualify to exclude all of the gain.
    • You received a Form 1099-S. If so, you must report the sale on Form 8949 even if you have no taxable gain to report. See Instructions for Form 8949 and Instructions for Schedule D for more details.
    • You wish to report your gain as a taxable gain even though some or all of it is eligible for exclusion. You may wish to do this if, for example, you plan to sell another main home within the next 2 years and are likely to receive a larger gain from the sale of that property. If you choose to report, rather than exclude, your taxable gain, you can undo that choice by filing an amended return within 3 years of the due date of your return for the year of the sale, excluding extensions.
    If NONE of the three bullets above is true, you don’t need to report your home sale on your tax return. If you didn’t make separate home and business calculations on your property, skip to Reporting Deductions Related to Your Home Sale, later."
If she gets a 1099-S she has to report it.
OK, I see it. She can simply deduct $500K from the gain value - even if she puts $0 as the cost-basis price.
MarkNYC
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Re: If home sale proceeds are less than exemption, does any form need to be filed?

Post by MarkNYC »

swampwiz wrote: Mon Oct 18, 2021 11:36 pm
OK, I see it. She can simply deduct $500K from the gain value - even if she puts $0 as the cost-basis price.
She would not deduct $500K from the actual gain amount. She would deduct the actual gain amount from the gain amount.

Also, I would recommend against listing zero as the basis for two reasons. First, the correct basis and gain amounts should be reported on the tax return, to the best of the taxpayer's knowledge, and zero basis is obviously incorrect.

Second, under certain conditions a surviving spouse filing single can claim a maximum $500K exclusion rather than $250K, but a tax return filed "single" may not make this particular situation clear to the IRS, and IRS correspondence related to the exclusion exceeding $250K may result, in which case resolving the issue may be a bit easier if the gain was reported correctly. In addition, if the house was previously owned jointly, and the proceeds are less than $500K, it seems there's a good chance the actual gain is less than $250K, which if reported correctly on a "single" tax return would help avoid any IRS correspondence.
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swampwiz
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Re: If home sale proceeds are less than exemption, does any form need to be filed?

Post by swampwiz »

MarkNYC wrote: Tue Oct 19, 2021 12:51 pm
swampwiz wrote: Mon Oct 18, 2021 11:36 pm
OK, I see it. She can simply deduct $500K from the gain value - even if she puts $0 as the cost-basis price.
She would not deduct $500K from the actual gain amount. She would deduct the actual gain amount from the gain amount.

Also, I would recommend against listing zero as the basis for two reasons. First, the correct basis and gain amounts should be reported on the tax return, to the best of the taxpayer's knowledge, and zero basis is obviously incorrect.

Second, under certain conditions a surviving spouse filing single can claim a maximum $500K exclusion rather than $250K, but a tax return filed "single" may not make this particular situation clear to the IRS, and IRS correspondence related to the exclusion exceeding $250K may result, in which case resolving the issue may be a bit easier if the gain was reported correctly. In addition, if the house was previously owned jointly, and the proceeds are less than $500K, it seems there's a good chance the actual gain is less than $250K, which if reported correctly on a "single" tax return would help avoid any IRS correspondence.
There are 2 problems with the determining the basis of the home. The first is that the home was built by the owner, contracting bits & pieces to contractors, so officially, the property was purchased for like $60K, and all the receipts for this was destroyed in a major flood. Then the drop in value to the home was taken as a casualty loss (this loss was use against a Roth IRA conversion), and then the state had a program to give grants to rebuild the home. It would seem that basis would only be that of the land, although perhaps it could be the land and the grant.
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FreddieFIRE
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Re: If home sale proceeds are less than exemption, does any form need to be filed?

Post by FreddieFIRE »

I would file the 8949 in all cases just to have it documented. It's a pretty simple form.
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ResearchMed
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Re: If home sale proceeds are less than exemption, does any form need to be filed?

Post by ResearchMed »

Katietsu wrote: Mon Oct 18, 2021 9:36 pm The person responsible for the closing, ie the settlement agent, would normally file the 1099-S with the IRS. If the sale proceeds will meet all the requirements to be excluded from income (Section 121 exclusion), then the seller should make the settlement agent aware. The agent should allow the seller to make such a certification and the agent should then be able to proceed without issuing a 1099-S.
How is it determined whether a 1099-S is needed?
Is it really just the seller telling the agent? Or does the agent look at the previous purchase price, and if there's clearly not $250k or $500k (single/joint), then they just don't issue one?
If the seller tells the agent that because of improvements or such there's less than the 250k/500k profit, it that "it"?
If so, that seems strange.

RM
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Chip
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Re: If home sale proceeds are less than exemption, does any form need to be filed?

Post by Chip »

ResearchMed wrote: Sun Oct 31, 2021 2:25 pm How is it determined whether a 1099-S is needed?
Is it really just the seller telling the agent? Or does the agent look at the previous purchase price, and if there's clearly not $250k or $500k (single/joint), then they just don't issue one?
If the seller tells the agent that because of improvements or such there's less than the 250k/500k profit, it that "it"?
If so, that seems strange.

RM
IRS requirements here.

It appears that a 1099-S is required unless an exception is met. One exception is that the seller(s) provide written & signed certification that they meet the requirement for exclusion under Section 121.

Though I don't know for sure, I suspect filing a false certification might bring tax fraud into the picture.
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