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Procedure to Exempt Gain From 1099-S Reporting (Rev. Proc. 2007-12)

The IRS has issued a set of written assurances (certification) that a real estate reporting person must obtain from the seller of a primary residence to exempt the sale from the 1099-S reporting requirements. The procedure is effective for sales occurring after 1/22/2007. The certification must be signed by each owner of the residence and must include the following:

  1. The seller owned and used the residence as his principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange of the residence.
  2. The seller has not sold or exchanged another principal residence during the 2-year period ending on the date of the sale or exchange of the residence.
  3. No portion of the residence has been used for business or rental purposes after May 6, '97 by the seller (or by the seller's spouse or former spouse, if the seller was married at any time after May 6, '97).
  4. At least one of the following three statements applies:
    1. The sale or exchange is of the entire residence for $250,000 or less.
    2. The seller is married, the sale or exchange is of the entire residence for $500,000 or less, and the gain on the sale or exchange of the entire residence is $250,000 or less.
    3. The seller is married, the sale or exchange is of the entire residence for $500,000 or less, and (a) the seller intends to file a joint return for the year of the sale or exchange, (b) the seller's spouse also used the residence as her principal residence for periods aggregating 2 years or more during the 5-year period ending on the sale date, and (c) the seller's spouse also has not sold or exchanged another principal residence during the 2-year period ending on that date.
  5. During the 5-year period ending on the date of the sale or exchange of the residence, the seller did not acquire the residence in an exchange to which Code Sec. 1031 applied.
  6. In cases where the seller's basis in the residence is determined by reference to the basis in the hands of a person who acquired the residence in an exchange to which Code Sec. 1031 applied, the exchange to which Code Sec. 1031 applied occurred more than 5 years before the sale date.

Rev. Proc. 2007-12 does not reflect a law change made after its release which added IRC Sec. 121(b)(4 [sic (5)]). The sample certification in Rev. Proc. 2007-12 does not include an assurance that there has been no period of nonqualified use after December 31, 2008. Also, the sample certification included in Rev. Proc. 2007-12 does not include an assurance, as required by Sec. 6045(e)(5)(A)(iii), that the full amount of the gain from the sale is excludable under Sec. 121.

The following provisions apply to the real estate reporting person:

  • The certification may be obtained no later than February 15 of the year following the year of sale. The sample certification form included in Rev Proc 2007-12 (modified to account for the two items noted above in the preceding paragraph) may be used or a substitute form containing all the required information may be used.
  • The reporting person will not be liable for “failure to file an informational return” or “failure to provide statement to the seller” penalties if the certification is obtained, unless the reporting person has actual knowledge that the certification is incorrect.

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