Tax Basis and reporting on land sale

Technical topics regarding tax preparation.
#1
RuthC  
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I originally put this post on another post that dealt with the sale of land, but didn't receive any responses. So I decided to list this separately. Hope it is not a problem.
My client and siblings inherited land several years ago and just sold it in 2019. He and his 4 siblings were in a heated discussion for a few years about selling the land, for how much, etc. A couple options to sell fell through. A couple siblings wanted to sell and the others didn't. So about 3 years ago my client paid several thousand dollars to a lawyer to settle the argument in court concerning what they would do. It was agreed to sell it. Now that it is sold, can the lawyer fees for this court ordeal be used in the calculation of the gain/loss even though it was a few years ago? Another lawyer was used for the closing in 2019 but a commissioner was hired for court. Also, would this transaction just be entered on Schedule D? I will be using the FMV at the time of the death and, it may come out to a loss. I haven't done the full calculations yet because the figures I have seen need adjustments that the lawyer is working on. My client is having a hard time getting a 1099 statement for his share from the lawyer. I am trying to prepare the return for the sale and would like some guidance. I have read a couple pubs but still need guidance. If it comes out to a loss, and he doesn't receive a 1099, can I still report it? I would like to report the sale to make things clean on the sale. Thanks for any responses.
 

#2
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This is a good Tax Adviser article on origin of the claim that I start with as a refresher when legal fees come up:

https://www.thetaxadviser.com/issues/20 ... duals.html
 

#3
RuthC  
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Thanks a lot ManVsTax. Very interesting. it will help!!

Just got the 1099 statement for the sale. I can't believe what he got. Not a 1099-S. He got a 1099-Misc form. The amount was entered in box 7 for non-employee compensation. I had told the client in Oct that it should be for 1099 S. I told the client that it would have been better if whomever completed the form would have done no statement at all. I told him to notify his lawyer that he needs to have that form deleted with the IRS. I am thinking of not even entering that 1099M (no where properly to enter it that fits the sale). And I doubt very much that the lawyer is going to correct it and issue the correct 1099 S.

If so, do you think entering the info on the sale without a 1099 would be ok? And not use the 1099M at all? I would just list the sale on form 8949 then to Sch D. I told the client that if he doesn't eliminate that 1099M, a red flag will go up to the IRS that will cause notices to him. I think I might be ok without a 1099 statement for the sale. And the sad part of this whole mess is probably for either a loss or gain of only about $15K. Any thoughts on this proposal on how to move forward?
 

#4
Joan TB  
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Sounds like your client's attorney (or his office person) have not done a closing directly before, and HAD NO IDEA of the tax reporting required. They probably never heard of a 1099-S and so used the only form they know about (1099-MISC). Presumably the dollar amount on the 1099-MISC received does indeed tie into the facts of the real estate sale. You may have to write a letter if the IRS sends a notice, but so be it - not really such a scary thing. The client should be understanding about it since it is a screw-up not of YOUR making.

Yes, I would report the sale where it needs to go with the correct details. If it is a loss, then so be it. Just like a lack of 1099-MISC for payments received of less than $600 does not mean that a taxpayer is not obligated to report that income. (It probably is ignored, just not supposed to be!)
 

#5
RuthC  
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Joan TB wrote:Sounds like your client's attorney (or his office person) have not done a closing directly before, and HAD NO IDEA of the tax reporting required. They probably never heard of a 1099-S and so used the only form they know about (1099-MISC). Presumably the dollar amount on the 1099-MISC received does indeed tie into the facts of the real estate sale. You may have to write a letter if the IRS sends a notice, but so be it - not really such a scary thing. The client should be understanding about it since it is a screw-up not of YOUR making.

Yes, I would report the sale where it needs to go with the correct details. If it is a loss, then so be it. Just like a lack of 1099-MISC for payments received of less than $600 does not mean that a taxpayer is not obligated to report that income. (It probably is ignored, just not supposed to be!)


Joan TB.....thanks for your response. The 1099-Misc amount isn't the exact amount of the proceeds but is close. And, after talking with the client, it appears the lawyer isn't familiar with the correct form. Apparently, the lawyer rarely sends a 1099 form to clients. The client is very understanding and knows who is a fault. Like I told him, I want to do it correctly rather than let it slide and see what happens. He agrees.

So Joan, do you think I should report the 1099Misc somewhere rather than ignore? And if so, where would it be entered? I just felt it would be better to respond to an IRS notice rather than reporting it somewhere incorrectly.

Thanks a lot for your thoughts. I really appreciate it!!!
 

#6
JR1  
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The chances of them fixing it correctly when they didn't even know how to do it, are slim. Maybe report the 1099Misc somewhere and clearly indicate that it's not subject to SE, then report the sale...
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#7
RuthC  
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JR1 wrote:The chances of them fixing it correctly when they didn't even know how to do it, are slim. Maybe report the 1099Misc somewhere and clearly indicate that it's not subject to SE, then report the sale...


JR......Thanks for your response....But, not only is it not subject to SE, the amount is incorrect. It definitely doesn't belong on Schedule C or E. So let's say I report the 1099 on Sch 1 Addtl Income, line 8 Other Income. That is going to increase the tax liability by thousands which I don't want to happen. That is why I figured it would be better to ignore and wait for the notice. I would just enter the sale on Form 8949 and then to Schedule D. When getting the notice, I would explain that the 1099 S wasn't received, which it wasn't, and at the same time explain the 1099Misc. I don't see anywhere else to enter the incorrect form 1099 Misc.
 

#8
JR1  
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Well, there are two choices. One is to report that 1099 and then deduct it back out with an explanation. The other would be to report it and then add it to basis on the cap gain....but that only works if client is in a bracket equal to or lower than cap gain rate. Or you wait for correction.
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#9
Joan TB  
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I would just enter the sale on Form 8949 and then to Schedule D. When getting the notice, I would explain that the 1099 S wasn't received, which it wasn't,


I would do this also. BUT I would also offer (for a fee) to help the attorney's office with the process of voiding a 1099-MISC that was issued in error and issuance of the correct 1099-S. Still time to do the filing before the 2/29/2020 deadline. Then everyone gets what is needed.
 

#10
RuthC  
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Thanks Joan for that suggestion. I will certainly look into that.
 


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