SALES OF PRINCIPAL RESIDENCES
Effective May 7, 1997, (subject to certain conditions) any gain of $250,000.00 or less ($500,000.00 for married couples) on the sale of a principal residence is exempt from federal income tax. Accordingly, Congress also amended the real estate reporting requirements to exempt certain sales of principal residences.
In general terms, no reporting is required if the sales price of the residence is less than $250,000.00 for a single person and $500,000.00 for a married couple.
A sale or exchange of a principal residence is exempt from the real estate reporting requirements if the settlement agent (escrow company) receives the following assurances from the transferor in writing:
- The seller owned and used the residence as his or her principal residence for at least 2 years during the 5 year period ending with the date of sale or exchange
- The seller has not sold or exchanged another principal residence during the 2 year period ending on the date of sale or exchange of this residence
- No portion of the residence has been used by the seller for business or rental purposes after May 6, 1997
- At least one of the following three statements applies
- the sale or exchange is of the entire residence for $250,000.00 or less; OR
- the seller is married, the sale or exchange is of the entire residence for $500,000.00 or less, and the gain on the sale or exchange of the entire residence is $250,000.00 or less; OR
- the seller is married, the sale or exchange is of the entire residence for $500.000.00 or less, and
- the seller intends to file a joint return for the year of sale or exchange, AND
- 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
- the seller's spouse also has not sold or exchanged another principal residence during the 2 year period ending on the date of sale or exchange of the residence
If there is more than one seller (defined as "owner" for the purposes of the above certification), assurance must be obtained from each owner (whether married or not). If the certification is not obtained from an owner, Form 1099-S is required to be filed on that owner. A husband and wife are required to complete separate certifications for the transaction to be exempt from reporting.
The certification can be received from the owner up to January 31 of the year following the year of sale or exchange. The written assurance obtained from the seller must be retained for at least 4 years after the year of sale or exchange by the settlement agent.
Penalties for not filing Form 1099-S will not be assessed unless the settlement agent knew that the seller's certification was prepared incorrectly.
Please click here to view the suggested certification form.(26K Adobe PDF)
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The taxability of the sale of a principal residence is not affected whether the certification is received or not. The purpose of the certification is to exempt the transaction from the real estate reporting requirements. However, if Form 1099-S is not filed on the sale of a principal residence, the seller may not have to report the transaction on his or her federal income tax return. However, if Form 1099-S is filed, the seller will be required to report the transaction on his or her federal income tax return.
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