This form is an important (and often overlooked) step in the closing process for every real estate
transaction, and if you’re in the practice of closing deals yourself, this is something you
probably ought to be doing.
Why is it Necessary?
To put it in the simplest of terms, the purpose of IRS Form 1099-S is to ensure that sellers are
reporting their full amount of capital gains on each year’s
tax return (and thus, paying the appropriate amount of taxes to the IRS).
For example, if someone buys an investment property for $100,000 and sells it for $150,000 (giving them
$50,000 of capital gains income) – they’re supposed to report this as taxable income at the end of each
year… but if they don’t, the 1099-S will act as a safeguard by keeping
the IRS in the loop and fully aware of what’s going on.
Here’s the good news:
If you close a transaction with a title company or attorney (as most people do), they will collect
the necessary information and file the Form 1099-S for you.
If the seller certifies that the sale price is for $250K or less, and the sale is for their
principal residence, the transaction is not reportable.
If the “transferor” (seller) is a corporation or a government unit (e.g. – if the property is sold
at a county tax auction), the transaction is not reportable.
If the total money, services, and property received is less than $600, the transaction is not
There are a few other exceptions, but these are the most common. Read the full instructions
for Form 1099-S at the IRS website for specific details.
Here’s the bad news:
If the transaction doesn’t fall within one of these exceptions, and if you are facilitating the closing
yourself, you are likely the one the IRS will expect to file the Form(s) 1099-S, since
the IRS instructions state (in fairly unclear terms) that “the person responsible for
closing the transaction” is required to file Form 1099-S.
Interestingly, the IRS will allow you to designate the person required to file Form 1099-S in a
written agreement, as per this excerpt from their instructions…
As we move on to Section 3, it says…
This section goes on to say,
Under these parameters, a purchase agreement seems to be an ideal document that can be written to
include ALL of the above information.
When I am the Buyer
In transactions where I am the buyer, I can easily include a clause in my purchase agreement
that identifies the Seller as the responsible
party for any IRS reporting required as a result of their receipt of funds related to the transaction.
Here’s an example of what this clause could look like:
With this kind of language included in my purchase agreement, the seller can agree to bear
the responsibility for filing the 1099-S. This is a significant help because, without this
language, I would have to collect the seller’s Tax ID number (which is something many
people may be hesitant to provide), complete the 1099-S myself and send a copy to BOTH the IRS and the
Technically speaking, the process isn’t all that difficult… but it’s even easier for the seller to
complete it on their own – because they have all the information and don’t have to send anything to me –
they would simply keep a copy for themselves and submit a copy to the IRS.
When I am the Seller
In transactions where I am the seller, I don’t include the above-mentioned clause in my contract,
because it’s not difficult for me to file the 1099-S on my own behalf, especially since I already
have all of the necessary information (including my own SSN or TIN) and I only need to
provide this document one time to the IRS.
It’s also worth noting that I don’t necessarily include this “designation clause” in
ALL of my purchase agreements. In many cases (depending on the size of the transaction,
location of the property and the parties involved), the closing may end up running through a title
agency or closing attorney – and in those cases, THEY (the closing agents) are responsible for
filing the 1099-S… so it’s not always appropriate to put this task on every seller
You’ll want to understand which transactions you’re planning to close in-house and only include it when
If you’re still reading this, give yourself a pat on the back. This is pretty dense stuff, I
How to Complete a 1099-S
To complete the filing process, you will need to order blank copies of IRS Form 1099-S and IRS Form
1096. These forms need to be printed with a very specific type of paper and ink, and while it’s
possible to reproduce these documents from home, it’s a lot easier to just order them from the IRS.
The forms are free and the IRS will send them by mail, usually arriving within about a
week. It takes less than a minute to order. Here’s the link.
Note: If you are filing more than 250 of these 1099-S forms, you are required to file
electronically (but you’ll probably want to engage the services of a CPA well before you get to that
The Filing Process: When Buying
For each transaction where I am the buyer, there are a few different ways I
can handle the filing of the 1099-S.
Ask the seller to complete IRS Form W-9 as part of their
closing package. When this form is completed, signed and dated, it will provide all the
information needed (including their TIN / SSN) to complete the 1099-S and 1096 and file it
Note: If I’m the Buyer/Closer and I’m filing the 1099-S for the transaction, I would list
myself as the “FILER” and the seller would be listed as the “TRANSFEROR” on both the 1099-S and
If I’ve included the above-mentioned “designation clause” in my purchase agreement, I
essentially don’t have any further responsibility, because the seller has agreed that they will
file these forms on their own behalf (this is something you’ll want to get verified by your own paid tax
If I didn’t get a W-9 completed by the seller and/or if I failed to include the “designation clause” in
my purchase agreement (or even if I did, but wanted to make the process easier for the seller), I
could put together a letter of instruction and send it to the seller along with all the forms
they’ll need to complete and submit to the IRS. In addition to the forms, I could also provide a
pre-addressed envelope for the sellers to send their forms to the IRS.
The Filing Process: When Selling
For each transaction where I am the seller, the filing process is pretty
straightforward, because I have all the information I need to complete and submit these forms myself.
I would complete a 1099-S for the transaction by filling out ALL the information on the form
(including my own Tax Identification Number, because I’m operating as an LLC) as both the filer and the
I would also complete one 1096 transmittal form with my information, including my TIN, as the filer.
For both of these forms, the IRS and I are the only recipients, so I would
simply send the 1099-S (Copy A) and the 1096 form to the IRS.
It’s also worth noting that if you sell multiple properties
for which a 1099-S filing is required, you will need to fill out a separate 1099-S form for each sold
property but you only need to complete one 1096 transmittal form.
Just add up the total amounts from box 2 of each of the 1099-S forms and enter it into box 5 of
the single 1096 form, and enter the total number of forms for which the 1096 covers in box 3 of
What Happens If You Fail to File Form 1099-S?
Suppose you fail to file a 1099-S for one of your self-closed deals. Will something bad happen
If you fail to file any type of 1099 form, the IRS can technically start issuing penalties
starting at $250 per failure to those who don’t follow through with this
requirement (that is, if they ever find out about it).
The thing to remember is… if you’re using the same closing rationale I do – there’s
a fairly small window for the transactions where you’ll actually have to worry about this form in the
Keep in mind:
A 1099-S is NOT required if the transaction is for less than $600 (and it’s not uncommon to
find acquisition opportunities in the price range).
A 1099-S is NOT required if the seller certifies that the sale price is for $250K or less, and the
sale is for their principal residence.
A 1099-S is NOT required if the seller is a corporation or a government unit (this includes most
foreclosures and properties sold at county tax auctions).
If a property is being sold for $5,000 or more, it’s fairly easy to justify the use of a title
company to close the transaction (and when you use a professional closing agent, they will handle this entire
process for you).