1099-MISC

[WhoDatFan]

My brother and I each received proceeds from the sale of our late mother's house.  When the house was sold, the proceeds were held by an attorney until the probate process completed, then we were each given checks for half the net proceeds of the sale.  The attorney then sent us each a 1099-MISC for the amount received, with the amount in Box 3.

Is the 1099-MISC the correct form and Box 3 the correct box on that form?  I ask because that would appear to make the amount 100% taxable (like any other income), when in fact it was the result of an inheritance, which should not be taxable, given that the FMV did not appreciate from the time of her death to the time of the sale.

I would like to know if I have cause to challenge the issuance of the form by the attorney, and any suggested course of action would be greatly appreciated.  Thanks in advance!

[DMarkM1]

You are correct.  Proceeds from the sale of real estate should be reported on a form 1099-S (extracts below).  Each of you should get a form 1099-S showing your shares of the proceeds.  You would then report the 1099-S in the "Investments" section in TurboTax.  You would enter your cost basis as your share of the fair market value on the date death.  There will likely be little, if any, taxable gain.

The issuer of the 1099-Misc should issue a corrected 1099-Misc to zero in box 3.  Then prepare and issue a 1099-S to properly report the transaction. Refer the issuer to Section I in this 1099 General Instruction, Error Type 2, for the steps to make the correction.  

Form 1099-S Instructions:

"File Form 1099-S, Proceeds From Real Estate Transactions, to report the sale or exchange of real estate."

"...you are required to report a transaction that consists in whole or in part of the sale or exchange for money, indebtedness, property, or services of any present or future ownership interest in any of the following.

• Improved or unimproved land, including air space.
• Inherently permanent structures, including any residential, commercial, or industrial building.
• A condominium unit and its appurtenant fixtures and common elements, including land.
• Stock in a cooperative housing corporation (as defined in section 216).
• Any non-contingent interest in standing timber.

Sale or exchange.

A sale or exchange includes any transaction properly treated as a sale or exchange for federal income tax purposes, even if the transaction is not currently taxable."

"...the person responsible for closing the transaction, as explained ... below, is required to file Form 1099-S.

If you are the person responsible for closing the transaction, you must file Form 1099-S. 

...

If the Closing Disclosure is not used, or no settlement agent is listed, the person responsible for closing the transaction is the person who prepares a Closing Disclosure that identifies the transferor and transferee, reasonably identifies the real estate transferred, and describes how the proceeds are to be or were disbursed."

@WhoDatFan 

[edited 3/11/2024 7:10AM PDT]

[WhoDatFan]

Thank you VERY much for your reply, @DMarkM1!

I had asked the firm about this situation, and their response (an excerpt of it) was as follows:

"While I am not a tax attorney or accountant, the 1099 S was not issued by our firm because the funds held in our trust were the total distributed by the Estate and not directly from the sale of real property. The 1099-MISC is typically reported as other income for beneficiaries of an Estate and any tax considerations would be based on your individual tax liability."

So the amount issued included half of the proceeds from the sale of my mother's house, plus approximately another $106.  So, the lion's share of the money ($88K+) WAS from the sale of real property, wasn't it?  In that event, shouldn't they issue a 1099-S for the portion that was a result of the sale of her house, and then a 1099-MISC for the remaining $106?  That would make sense to me, but tax laws don't always make sense...

I've contacted the firm again asking exactly that, but I don't know if I actually have any grounds to do so.  I just know that if I proceed with the forms I have now, I'm probably on the hook for another $20K of taxes that I otherwise shouldn't have to pay, given the circumstances.

Thanks again for your help, @DMarkM1!

[DMarkM1 · Accepted solution]

Understand. Hopefully they will correct it as that makes it more smooth at the IRS end.  If, however, they will not make the correction, you can file it correctly on your tax return.   You don't pay taxes on income that is not taxable to you. 

The forms 1099 are informational returns filed to the IRS by the issuer with a copy to you.  As long as the income is reported on your tax return the IRS will be able to reconcile it with the 1099-Misc they received.  You will file as though the income was reported on a 1099-S as I outlined in my earlier post in the "Investments " section as a sale of asset.  Use the "Second home, land, other" category.   

I don't know what the other $106 was for, but unless it was actually income earned after the date of death, then it is inherited and not taxable either.  You might ask that question if you don't already know.    

Ultimately, for that amount you could enter only that small amount as a  taxable 1099-Misc box 3 income which will be listed on your tax return as other income.  That along with the 1099-S amount can then be reconciled with the whole  reported 1099-Misc amount by the IRS.

Keep notes of what happened with your tax records should it ever come up.  You'll be good.  

@WhoDatFan       

[WhoDatFan]

Hey, thanks again, @DMarkM1.

After a brief back-and-forth with the attorney, it sounds like they're going to amend the 1099 to exclude the proceeds from the home sale, so I think it should greatly simplify the situation.  So I think we're finally on the right track!  I'll update this post once I find out more, hoping it might benefit anyone else who lands in a similar situation.

Have a great afternoon!