The IRS has released Revenue Procedure 2007-12, which clarifies what “assurances” real estate brokers must obtain from persons who sell their principal residence.
Real estate brokers are generally required to provide a Form 1099-S to a person selling or exchanging real estate. This form helps the IRS track the seller’s proceeds from the sale, to ensure that the seller reports that taxable income on their federal income tax return. Failure to file this form can subject the broker to tax penalties for failure to file a return or for failure to furnish a payee statement to the seller (Sections 6721 and 6722 penalties).
However, brokers are not required to file and are not subject to these penalties if the broker “receives written assurance in a form acceptable to the Secretary from the seller” that the sales proceeds are excluded from the seller’s taxable income pursuant to Section 121. Section 121 allows sellers to exclude up to $250,000 for single taxpayers and $500,000 for married taxpayers of gain from the sale of a principal residence if the taxpayer owned the property for five years and the taxpayer lived in the residence for two of the past five years.
In Revenue Procedure 2007-12 the IRS has spells out what constitutes “written assurance in a form acceptable to the Secretary.” Revenue Procedure 2007-12 sets out the following assurances that brokers must obtain:
(1) The seller owned and used the residence as the seller’s principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange of the residence.
(2) The seller has not sold or exchanged another principal residence during the 2-year period ending on the date of the sale or exchange of the residence.
(3) No portion of the residence has been used for business or rental purposes after May 6, 1997, by the seller (or by the seller’s spouse or former spouse, if the seller was married at any time 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 of the entire residence 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 the year of the sale or exchange, (b) the seller’s spouse also used the residence as his or her principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange of the residence, and (c) the seller’s spouse also has not sold or exchanged another principal residence during the 2-year period ending on the date of the sale or exchange of the residence.
(5) During the 5-year period ending on the date of the sale or exchange of the residence, the seller did not acquire the residence in an exchange to which section 1031 applied.
(6) In cases where the seller’s basis in the residence is determined by reference to the basis in the hands of a person who acquired the residence in an exchange to which section 1031 applied, the exchange to which section 1031 applied occurred more than 5 years prior to the date of the seller’s sale or exchange of the residence.
The main difference between this revenue procedure and the prior procedure is, as mentioned above, that it accounts for Section 1031 exchange transactions.
Revenue Procedure 2007-12 also provides a sample form that brokers may use to capture these assurances. Brokers must make sure to document these assurances for sales and exchanges of principal residences occurring after January 22, 2007.
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