What Is a 1099-S Tax Form and What Is It Used For?

What Is a 1099-S Tax Form and What Is It Used For?

Posted by on Mar 12, 2022


The IRS uses the 1099 Form for taxpayers to report various miscellaneous income other than wages. These include contractor pay, rental income, and income from interest and dividends. However, the 1099-S is specifically used to report the proceeds from real estate transactions so that the taxpayer can accurately reflect gains or losses.

You use the 1099-S to report the transaction to the IRS any time you sell real estate. Examples include selling your primary residence, or a timeshare or vacation home, in which cases you will also need to file Form 8949 and Schedule D. If the transaction was the disposition of an investment or inherited asset, you will use 1099-S plus Schedule D. Finally, if the sale involved a business or rental property, you would use 1099-S, plus Form 4797 and Schedule D.

Reporting and Paying Capital Gains

One purpose of Form 1099-S is to ensure that taxpayers are reporting and paying their capital gains taxes. Taxpayers who prefer to defer the recognition of the gain and the associated tax may want to consider replacing investment property through a 1031 exchange instead of transacting a traditional sale. By completing a 1031 exchange, taxpayers can relinquish the property they wish to sell and replace it with a new property (or more than one) without recognizing the gain. Let's review an example:

Taxpayer Joe owns a commercial property valued at $1 million, in which his basis is $600,000. Joe wants to sell the property and invest in a different asset but would like to do so without paying capital gains taxes on the $400,000. By completing a 1031 exchange, Joe can invest the commercial property's entire $1 million value into the new asset.

How Does a 1031 Exchange Work?

As you can imagine, the rules around this process are strict. The IRS requires taxpayers to follow them closely in order to maintain their eligibility. One crucial aspect is that the exchange must be managed by a neutral third party, known as a Qualified Intermediary or exchange accommodator. This requirement ensures that the investor does not have access to the proceeds from the sale during the time between the sale and the purchase of the replacement property. Instead, the intermediary maintains the funds in a separate account for the taxpayer and carefully gathers the necessary documents to qualify the transaction.

It's also crucial that the transaction follows the IRS timeline. The investor must identify potential replacement properties within 45 days of the sale of the relinquished property closing and complete the purchase(s) within 180 days. These are aggressive deadlines to meet.

The replacement property must have a value at least as great as the relinquished and the same or higher debt level. It must also qualify as "like-kind" property. "Like-kind" has been held by the IRS to include any investment or business property so that you can exchange a residential rental for an office building, for example, or retail property for a self-storage facility.

In addition to the 1099-S Form for the sale and purchase of the real estate, the use of the 1031 exchange will necessitate the filing of Form 8824.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

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