The IRS has issued a new procedure that changes the form certification a real estate reporting person must obtain from the seller of a principal residence in order to exempt that sale from the usual real estate information reporting requirements.  This applies to the sale or exchange of a principal residence occurring after January 22, 2007.

Background. 

Generally, a “real estate reporting person” (escrow officer, lender, real estate broker) is required to file IRS Form 1099-S (Proceeds From Real Estate Transactions) on the sale of a home.  Among other things, he or she must report the gross proceeds of the transaction.

If the seller certifies in writing certain facts, including (1) that the property is his or her principal residence, and (2) that the full amount of the gain on the sale or exchange is excludable under Internal Revenue Code section 121 (exclusion of up to $250,000/$500,000 of gain from sale if it meets certain conditions), there is no need to file Form 1099-S.

Certification required of seller. 

Under the new law, in order to be exempt from the IRS’s information reporting requirement, the real estate reporting person must obtain from each seller a written certification, signed under penalty of perjury, that six specific statements are true.  Here is a brief summary of those statements:

1. The seller has owned and used the property as his principal residence for at least two years during the past five years.
   
   
2. The seller has not sold or exchanged another principal residence during the past two years.
   
   
3. No portion of the residence has been used by the seller for business or rental purposes after May 6, 1997 .
   
   
4. At least one of the following three statements applies:

• The sale or exchange is of the entire residence for $250,000 or less, or
  
  
• The seller is married, the sale or exchange is of the entire residence for $500,000 or less, and the gain on the sale or exchange is $250,000 or less, or
  
  
• The seller is married, the sale or exchange is of the entire residence for $500,000 or less, and (a) the seller intends to file a joint return for this year, (b) the seller’s spouse used the property as her principal residence for at least two years during the past five years, and (c) the seller’s spouse also has not sold or exchanged another principal residence during the past two years.

5. During the past five years, the seller did not acquire the property in a section 1031 exchange.
   
   
6. If the seller’s basis in this property is determined by the basis of a person who acquired the property in a section 1031 exchange, that exchanged occurred more than five years ago.

What certification form do I use? 

The IRS’s sample certification form may be accessed at http://www.irs.gov/irb/2007-04_IRB/apa.html.  You are not required to use this exact form, but the specific content and wording of your form must comply with Revenue Procedure 2007-12.

When do I obtain the certification, and what do I do with it? 

You have until January 31 of the year following the sale or exchange to obtain the certification, and you must retain it for four years.

What should agents be doing now? 

While you may not necessarily be completing and filing these forms yourself, you should insure that they are being handled correctly in order to avoid potential liability as a “real estate reporting person”. 

In summary, for every sale or exchange of a principal residence occurring after January 22, 2007, the real estate reporting person must:

• Determine whether a Form 1099-S must be filed.  If so, file it and furnish the seller with a payee statement.
  
  
• If the transaction is exempt from Form 1099-S reporting, have each seller complete a certification form that meets all the requirements of Revenue Procedure 2007-12.
  
  
• If a seller cannot make the six assurances required, a Form 1099-S must be filed.
  
  
• Make sure the certification is completed by January 31 of the year following the sale or exchange.
  
  
• Retain the certification records for four years.

Questions? 

Contact one of our taxation specialists for assistance or more information. 

J. Timothy Maximoff
jtm@hogefenton.com

Sonia M. Agee
sma@hogefenton.com

The information provided in this update may not be applicable in all situations and should not be acted upon without specific legal advice based on your particular situation.