1099-S Confusion

Hello. My wife and I sold our house last year and had some confusion about the 1099-S. At closing we both received information sheets about the 1099-S that my closing agent crossed out and wrote “exempt” on them. Also, they included 2 sets of the 1099-S addressed to each spouse titled “copy A, B, C” and the sales price was distributed between us equally on them. Do we have to file them if we’re exempt?
Also, we plan to file separately and to make things even more confusing I owned and lived in the home for 4 years while she moved in last year after we got married, so is she even technically exempt? It's considered marital property in Minnesota.
Answers
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Hello,
With the Form 1099-S, I assume the title agent was providing the Form 1099-S as a matter of convenience and that she was writing exempt to remind their tax reporting people not to file the Form 1099-S with the IRS.
Your wife would not qualify for the full exclusion, but she could qualify for a partial exclusion depending on the reasons for selling the home. See this section of IRS Publication 523 for a more detailed explanation of reasons that may qualify her for a partial exclusion. In short, if the move was work related (meaning your old home was more than 50 miles from a new job, and the new home is closer) health related (to be closer to health care because of newly diagnosed health conditions) or an unforeseen circumstance, she may get an exclusion proportionate with the time she lived in the home. There is a list of acceptable unforeseen circumstances in the link above.
If she was never put on the title and the gain is 250k or less, you could choose to report the sale on your return only. Minnesota is not a community property state, and so you do not need to split your refund between the married filing separate returns.
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