1. They live in NY. That is their resident state so it taxes all income. Frequently Asked Questions about Filing Requirements states: As a resident, you pay state tax (and city tax if a New York City or Yonkers resident) on all your income no matter where it is earned.
2. No place to made adjustments since it is all taxable to federal and state.
3. There are documents which state all worldwide income is taxable to resident. There are some exceptions. If you feel you may qualify at the federal level, go through this quick quiz. For NY, you must be out of the country 450 days out of 548, see State of New York Taxation & Reporting of Foreign Income.
4. You don't need the 1099-S form to enter the sale of a second home. It is just a question for the IRS to match up forms if you have one. The sale goes on sch D and is entered in the same section as stocks and bonds. You will select sale of home. For help entering, see Where do I enter the sale of a second home, an inherited home, or land on my 2023 taxes?
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