How does one report gain/loss on inherited property when the 1099-S doesn't match actual share of value?

[Klegg]

My dad passed away a couple years ago and left our family home to my mom, my two siblings, and to myself. The home has been distributed/title has been transferred from the trust to the four of us as beneficiaries. My mom and I are in the process of refinancing to pay off the existing reverse mortgage as well as buying out my siblings. We have agreed the current FMV is the same as the date of death value, so there should be no gain or loss for either of my siblings. However, the 1099-S each sibling will receive will be the amount paid to each (after the reverse mortgage has been paid off) rather than their actual share of value. Therefore, if they report their 1099-S, it will appear as though there is a loss when there is none.

How can they correctly report their cost basis and share of value at the sale if their 1099-S does not match? Additionally, the home is not the primary residence of either sibling who is selling their share. 

[M-MTax]

If there's a matching problem they can attach a statement for the difference. 1099-S does not always match the sales price but if their sales price would be reduced by the note paid off anyway so it should match.

[Klegg]

@M-MTax Thanks so much for your insight! A statement of explanation makes sense. I assume the have to paper file in that case? Perhaps I am also figuring the cost basis incorrectly?

For the purposes of making a simple calculation, let's assume the value of the home at date of death as well as today is $1,000,000. Let's also assume a mortgage amount of $400,000, and that each sibling's share is 20%. Wouldn't each of their cost basis as well as share of value at "sale" be $200,000 (20% of $1M)? So there is no gain or loss. Yet, at the end of the refi, the amount they are paid out and their 1099-S will be $120,000 (20% of [$1M-$400k]). Therefore, it would incorrectly show a loss of $80k on each of their returns. 

[Mike9241]

their 1099-s should not reflect the mortgage payoff. the 1099-S is supposed to reflect the gross sales price not the net cash received. a mortgage has no effect on the cost basis. if the FMV at DOD was $1,000,000 and the same today cost basis is $1,000,000.   

[Klegg]

@Mike9241 Unfortunately, title/escrow has confirmed that the 1099-S will reflect the net cash received. They said if this was a purchase, it would reflect gross sales price. But because my mom and I are refinancing (limited cash out to only pay off existing mortgage and siblings with my siblings submitting their payoff demands), their 1099-S will reflect net cash. They can't seem to figure any way around this. In which case, do they paper file a statement of explanation for the discrepancy? 

[Mike9241]

their 1099-S may reflect net cash (buyout price less their share of the mortgage and closing costs) but for tax purposes they need to report their share of the gross sales price and closing costs.  mortgages do not affect these items. so they'll be reporting more than received which should not be a problem.  the institution would have to mail in the 1099-S with a clarifying statement. my hunch is the clerk entering the 1099-S info will just toss the statement. it won't hurt to send it.  since you and your mother are the purchasers you don't get a 1099-S.