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I sold my house last year. A portion of the house included a residential rental. The buyer was several weeks late closing escrow. I charged the buyer a per day penalty to cover my mortgage interest and property taxes, which amounted to a couple thousand dollars. However, now I am wondering how to report that cash to the IRS (and I am annoyed that I didn’t charge him enough to cover my taxes).

Note: the title company did send me Form 1099-S. Line 2 (Gross proceeds) did not include the buyer penalty, and Box 4 (other consideration) was not checked.

Questions:

  1. In Pub 523, Selling Your Home Worksheet 2, should the buyer penalty be included in Line 1 “All money (currency, check, wire transfer)” in the sale price of the house? Note: for me I am was well below the $250k limit on eligible exclusion of gain.
  2. In Form 4797, Sales of Business Property Line 2 property table, should the buyer penalty be included in column (d) Gross sale price, despite the fact that it was not reported in Form 1099-S?
  3. Should the buyer penalty be included anywhere else e.g. Form 1040 Schedule 1 Line 8 Other Income?
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Treat it as an addition to the sale price. You sold the house for $X, and charged the buyer additional $Y due to being late - your total gross sale price was $(X+Y).

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