You may receive IRS Form 1099-S, Proceeds From Real Estate Transactions if you sold or exchanged real estate in the tax year. For consumers, this usually involves the sale of a primary or secondary residence. If you receive the 1099-S tax form, report the information on Form 8949 and Schedule D of your 1040 tax return. You must file additional forms if you sell real estate as part of your business or in installments.
The 1099-S Story
The settlement agent (or "filer") responsible for closing a real estate transaction, such as a title agent or attorney, creates Form 1099-S and distributes it to the IRS and the property seller (the "transferor") unless an exception applies. One crucial exception occurs when you certify to the filer that the capital gain on the sale of your principal residence is less than $250,000 (or $500,000 for joint filers). You can certify this exception only if:
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- You haven't excluded a gain or loss on another main home in the past two years
- You owned and lived in the property for two years within the last five-year period before closing.
Form 1099-S identifies the filer and transferor, as well as the following information:
- Your account number
- Date of closing
- Gross proceeds
- Whether the transferor will receive property or services as part of the consideration for the sale
- Whether the transferor is foreign
- The buyer's part of real estate tax
Other filing exceptions occur when a real estate transaction is a gift, bequest, foreclosure, abandonment or is less than $600. Filers must distribute Form 1099-S by January 31 in the year following the real estate transaction unless the filer receives an exception certification by that date.
Read More: What if I Don't Get 1099s?
Capital Gains and Losses
Two important factors that apply to real estate sales are the amount of gain or loss and how long you owned the property before the sale.
Proceeds from a real estate sale create a capital gain or loss. The sale of property held for a year or longer generates a long-term capital gain or loss, whereas shorter holding periods result in the short-term variety. The IRS taxes long-term capital gains at favorable rates (0 percent, 15 percent or 20 percent, depending on your annual income), but short-term capital gains are subject to your ordinary tax rate.
If you experience a capital loss on the sale, you can use it to offset any other capital gain for the year and up to $3,000 of ordinary income. You can carry any unused capital losses forward to future years until exhausted.
Read More: How to Pay Taxes on Capital Gains
Completing Form 8949
You use the information on Form 1099-S to complete Form 8949, Sales and Other Dispositions of Capital Assets. Form 8949 usually applies to stock sales, but you use it for any sale of a capital asset, including real estate. The form has sections for short- and long-term transactions, allowing you to specify the dates, proceeds, cost, adjustment codes and amounts and capital gain or loss of each transaction.
If you receive a 1099-S but can exclude some or all of the long-term capital gain, you enter Code H on the transaction line and reduce the gain accordingly. You can also use Form 8949 to report selling expenses (Code E) not reflected on Form 1099-S.
Form 8949 lets you calculate separate total gains and losses for long- and short-term property. You use these totals on Schedule D of Form 1040.
Completing the Process
You finish reporting your 1099-S transaction by transcribing your short- and long-term totals from Form 8949 to Schedule D, Capital Gains and Losses. Schedule D allows you to adjust your totals in several ways, including applying capital loss carryovers. Finally, copy your totals to the appropriate lines on Form 1040.