Received 1099-S for property we didn't own

[comrade_general]

We have received a 1099-S and not sure what to do with it.  My father-in-law inherited his mother’s apartment building about 20 years ago.  He passed away in 2015 and my mother-in-law has been keeping up the mortgage payments, repairs, and expenses since he passed away.  The apartment building has not been generating any rent due to the poor condition and renters not paying.  My mother-in-law decided to sell last summer because the loan was coming due in full in September.  She had yet settled my father-in-laws estate which she had to do before she could sell the property.  As soon as the estate was settled the rental property went under contract and was sold in about four weeks.  She asked my wife to go to closing and had the closing attorney cut her a check for part of the proceeds and said she will get a 1099-S.  My mother-in-law got a smaller portion of the proceeds and also got a 1099-S.  The property was never in my wife’s name and she was in no way in possession at any point.  The property was listed as John Doe Heirs and Jane Doe.  My wife's name was not on the title or the deed.  The property sold for $220,000 and had a mortgage that had to be paid off.  After expenses my wife received $110,000.  If the property were in decent shape it would have easily sold for $375,000-$400,000.  The repairs were too much for my mother-in-law so she decided it was time to sell and was sold as is with no warranty.  How would we go about filing our 1099-S or would there be anything to report?

This seems like it is considered a gift but wanted to make sure.  The closing attorney was kind of a crook and tried to take some of the proceeds until we called him out.  He almost got away with $50,000.  If we were not supposed to get a 1099-S one could argue that he did it out of retaliation as my wife was very vocal about his math.  

[Hal_Al]

First you need to determine what income there is to report. Then determine who has to report it.

The building/property has a cost basis. The reportable capital gain is the difference between what the property sold for and that cost basis.  Mortgage payout and current market value are irrelevant. If you mother-in-law [MIL] inherited the property in 2015, her cost basis was the fair market value in 2015 (not what your father-in-law inherited it for way back when or what his mother paid for it).  So, it's possible the current sale is actually showing a capital loss, rather than a gain. 

Somebody has to report the gain or loss. Your MIL should report it all and treat the $110,000 as a gift to you (requiring her to file a separate gift tax return*).  Or you could each report your share based on the 1099-S, but it's a little "iffy" is you actually had a beneficial interest in the property. 

So, you need to report an erroneous 1099-S.  Enter the sale at 

-Investment Income

   -Stocks, mutual funds, Bonds, Other (Real estate is other)

Answer no, when asked if you got a 1099-B. then follow the interview.  You will reach a screen titled "Select any less common adjustments that apply". Then check "Some or all of the proceeds of this sale do not apply to me'. It will go on form 8949 with 0 net gain or loss and a code for nominee adjustment.

*"Gift Tax" is somewhat of a misnomer.  Even though a gift tax return may be required, very few people ever actually pay federal gift tax. The purpose of the gift tax return is usually only to document a reduction in the allowable estate tax exemption.
See https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax-Made-Simple/...   

[dmertz]

Why did your wife get a portion of the proceeds if she was not an owner or inheritor of the property?  Why wasn't it all paid to your mother-in-law?

"The property was listed as John Doe Heirs and Jane Doe."

It's not clear how this relates to your wife and your mother-in-law.  It seems to imply that there was more than one owner.  If Jane Doe is your mother-in-law and John Doe Heirs is your wife, then your wife did own a portion of the property.

If the proceeds were intended to be a gift from your mother-in-law to your wife, it would have been more proper for the entire amount to have been paid to your mother-in-law and then your mother-in-law could have given some amount to your wife.  If this is what should have happened, you should try to get your wife's Form 1099-S corrected to show $0 and your mother-in-law's Form 1099-S to show the entire amount.  Absent these corrections, your wife could use the nominee process to transfer the income to your mother-in-law.

If instead a portion of the property was gifted to your wife before the sale, your wife would have been part owner.  Your wife would have to have been shown on the deed prior to the sale if that was the case.

As others have said, one needs to know the cost basis (value at the time of father-in-law's death plus any adjustments to basis since) to be able to determine the taxable gain or loss.