1099-S Reporting of 1031 Exchange Transactions

1031 exchanges and tax form 1099

Many people conducting 1031 exchanges are concerned about getting 1099’d on the sale of their relinquished property. They are worried that if the IRS is notified of their sale, that it will jeopardize their exchange.

Taxes & 1031 Exchanges

Title companies, escrow companies, attorneys, mortgage brokers, real estate brokers, and other people involved in closing real estate transactions (the "Reporting Person") for the “sale or exchange” of real estate must report these transactions to the IRS under 26 U.S. Code § 6045(e).  Penalties are imposed if the Reporting Person fails to comply with these rules.

Under Treasury Regulation 1.6045-4(b)(1), the term “sale or exchange” includes any transaction properly treated as a sale or exchange for federal income tax purposes, whether or not these transactions are currently taxable. So the requirements of § 6045 also apply to 1031 tax deferred exchanges under § 1031 of the Internal Revenue Code as reportable transactions.

At the outset of a 1031 tax-deferred exchange, the Reporting Person conducting the closing of the sale of the relinquished property may not know if the exchange will be fully completed, or if the like-kind replacement property will be received by the taxpayer within the 180 exchange period, or even if the replacement property will qualify for tax-deferral. None of that matters though because the Reporting Person is still legally required to report the transferor’s proceeds to the IRS using form 1099-S.

Who is the Taxpayer that is Issued the 1099-S?

Typically, the "Reporting Person" is the taxpayer who:

  • Transfers or sells the property being sold
  • Conveys the property to the buyer
  • Would be entitled to the payment of the proceeds or to whom the proceeds is credited to such person’s account. 

The term “transferor” includes any persons conveying “ownership interest” in real estate such as:

  • Fee simple interests
  • Life estates
  • Reversions
  • Remainders
  • Perpetual easements
  • Lease-hold estates of 30 years or more, including any period for which such rights may be renewed at the option of the holder.

In a standard forward exchange, the proper person to be issued the 1099 is the taxpayer conducting the exchange — the seller conducting the exchange — and not the qualified intermediary.

After the exchange is completed the seller or exchanger will inform the IRS of the connection between the sale of the relinquished property and the purchase of the replacement property on IRS form 8824 with their federal tax return. This allows the IRS to understand how the first 1099 relates to the tax-deferred exchange, and the full story of events will be revealed.

  • 1031 Hotline: If you have questions about the 1031 exchange and 1099 reporting, feel free to call me at 612-643-1031.

Defer the tax. MAXIMIZE your gain. 

 

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