Where do I report nominee distribution that was made on a 1099-S Received?

[Mercied]

I have a client (person A) who received a 1099-S for proceeds on a property he sold in a 1031 Exchange.  He had another investor (person B) in the property who did not receive his share of the 1099-S.  Person A paid Person B 1/3 of the proceeds (what he was entitled to) and issued a 1099-Misc for the Nominee Distribution.  So far so good.

When I prepared the return, I showed the proceeds paid to Person B as a Nominee Distribution on Person A's return.  This resulted in a negative amount on Line 13 of Schedule D.  When the return was filed, the return was rejected.

The question I have is if there is a better way to enter this payment.  If not, then Person A will have to file a paper return.  Am I correct here?

[sjrcpa]

How about in  the adjustment column?

I'm not so sure 1099-MISC was the correct form to issue. If Person B's cut was really an expense, then for the Sch D it would be an expense of sale.

[Mercied]

Double checked the docs.  It wasn't a 1099-Misc that the client created but a 1099-S.  So the best thing would be to reduce the proceeds as an offset?

[sjrcpa]

IRS gets the 1099-S issued to your client and will use that for matching. I would not reduce the Proceeds on your client's return.

[Mercied]

We are able to do that on an 8824.  The sale price is the amount the client received and then there is a separate line to determine the Boot that specifies Cash Received less expenses.  Per the IRS instructions:

Line 15.

Include on line 15 the sum of:

• Any cash paid to you by the other party;

• The FMV of other (not like-kind) property you received, if any; and

• Net liabilities assumed by the other party—the excess, if any, of liabilities (including mortgages) assumed by the other party over the total of (a) any liabilities you assumed, (b) cash you paid to the other party, and (c) the FMV of the other (not like-kind) property you gave up.

See the example in the instructions for line 18.

Reduce the sum of the above amounts (but not below zero) by any exchange expenses you incurred.

I would reduce net cash received by the amount paid to Person B (the client issued a separate 1099-S for that)?

[qbteachmt]

"I would reduce net cash received by the amount paid to Person B (the client issued a separate 1099-S for that)?"

That implies your client sold to Person B.

This is the operative statement: "He had another investor (person B) in the property"

Why? What is "investor" for this property? Lender? Partner? Co-owner? Because right now, it isn't clear if this is a Cost of the sale, or a pay-off of debt, or a share of profit, or a bunch of other things yet to be determined.

[Mercied]

The scenario is this:

Client - Person A bought a building with Person B.  Person B put up a percentage of the funds with an understanding that when the building sells, he would his percentage of the proceeds.  Person B was a silent partner.

Person A found a buyer for the building and sold it.  Both parties agreed to do a 1031 exchange for Building 2.  The understanding is that when building 2 sold, they would split the proceeds on that sale. 

Building 2 sold.  Person A received a 1099-S for 100% of the proceeds.  The realtors and agents dealt almost exclusively with Person A.  Since Person A was not entitled to 100% of the proceeds per their agreement.  Part of the proceeds are being treated as having been received as a nominee.  He then turned around and paid Person B the funds he was entitled to and provided him with a 1099-S for his share of the proceeds.  

For example (not the real numbers here) Person A put up $200,000 and Person B put up $100,000 to buy Building 1 for $300,000.  Building 1 sold for $500,000 and Person A did a 1031 exchange for Building 2 for that amount.  Building 2 Sold for $600,000.  Person A received the 1099-S for the full $600,000.  Person A paid person B the $200,000 he was entitled to and issued a 1099-S for that amount.  

My question here is where to put that $200,000 in Pro-Connect.  Person A is doing another 1031 Exchange with part of his proceeds.  He is keeping $100,000 and buying another building for $300,000. So on the Person A's 8824, under cash received I would put Proceeds from the first 1099-S less the 1099-S that Person A issued to Person B and the amount paid for the new building.  Is that the correct way to do it?  Or is there another way?

[qbteachmt]

"Person B was a silent partner."

There is no such terminology for Tax purposes. Person B was:

Partner in a Partnership or corporate entity which owned the property

Co-owner on the title

Lender to Person A, who is the sole owner and the title; sublevels:

with or without a mortgage, and with or without a note payable executed between Persons A and B

And this property was being reported as in some sort of operation, by Whom, on Which Tax Form, during that ownership which must be defined and described per its reality.

"He then turned around and paid Person B the funds he was entitled to and provided him with a 1099-S for his share of the proceeds."

But that is issued to a Seller, and you kept stating this is Partner, or Nominee, not Seller. Your client is not the issuer of a 1099-S and the Person B is not a Seller, in your descriptions. Did you read the instructions for who issues a 1099-S? And for which type of sale it applies to? Your client did not "close" someone else's sale.

"Building 1 sold for $500,000 and Person A did a 1031 exchange for Building 2 for that amount."

Then you already have a problem, if Person B was supposedly involved. Or, Person B was only a lender to Person A. Because your Person A cannot Exchange something on their own, if they are not the legal owner of that something. You cannot sell or exchange other people's property, not even if you are a Partner or partial owner in it.

And at this point of that first exchange, your two people needed to renegotiate the original deal, because you already told us this Sale was supposed to benefit both of them. if only Person A makes the exchange, that leaves Person B out of the exchange.

"My question here is where to put that $200,000 in Pro-Connect."

Nope; that's not the first question at all.