Scenario: Two sister own a house. One sister buys out the other. Sister one refinances the house and all of the proceeds go directly to her (she would then get the 1099S). Sister one has bank check issued to sister 2 for her portion.

Question: Since sister 2 is not getting a 1099S, does she have to claim the income? It would seem to me if sister 1 gets the 1099S, she would be responsible for the entire tax burden.

Question: Since sister 2 is not getting a 1099S, does she have to claim the income? ====>>>in general yes aslongas she has taxable gain on the sale of her ownership. However,it depends; Buyouts are included as an item of gross income and are considered as fully taxable income ; the
amount of any item of gross income must be included in the gross income for the taxable year in which it is received by the taxpayer. Thus, a buyout is taxable in the year of payment, regardlessof the year in which the buyout is authorized. The IRS considers the profit she makes from selling a house as a taxable gain. However, it allows a significant exclusion or reduction if shhe meets several requirements. The house she sold must have been owned by her and has been her primary residence. she must have resided in the home for at least2of the 5 years preceding the sale. If she meete these requirements, federal tax laws allow her to exclude a fixed amount from her taxable gain. if sheis a single filer,she may exclude $250k. she must pay taxes on the amount of her taxable gain from the sale that exceeds the amount of her exclusion.
Note; When you sell your home, federal tax law requires lenders or real estate agents to file a Form 1099-S with the IRS and send you a copy if you do not meet IRS requirements for excluding the taxable gain from the sale on your income tax return. To avoid violating IRS reporting rules, the lender or agent may send you a 1099-S even if you qualify for the taxable gain exclusion. if they qualify for the taxable gain exclusion. The gross proceeds from the sale of their home appear in Box 2 of 1099-S.
It would seem to me if sister 1 gets the 1099S, she would be responsible for the entire tax burden.====>>no she generally needs to report the sale/buyout of her home on her tax return if she received a Form 1099-S or if she does not meet the requirements for excluding the gain on the sale/buyout of her homeas mentioned above. If profit exceeds the $250k limit, the excess is reported as a capital gain on f8949/Sch D