1099 Reporting & Rentals

Posted by Lee Reams Sr. on

Two questions to be answered on Schedule E, Part I (rental real estate and royalties section) are (A) “Did you make any payments in [tax year] that would require you to file Form(s) 1099?” and (B) “If Yes, did you or will you file all required Forms 1099?” Does this mean that landlords are responsible for issuing Forms 1099-MISC to their non-employee service providers such as gardeners, plumbers, and other maintenance workers? The instructions to Form 1099-MISC emphatically say to report on Form 1099-MISC only when payments are made in the course of a trade or business, and that “you are engaged in a trade or business if you operate for gain or profit.” So, the issue boils down to the question of whether a rental real estate activity is a trade or business.

Unfortunately, there is no bright-line definition of a trade or business in the over 70,000 pages of the tax code. There are only case histories and administrative rulings to go on. The determination can be subjective, and the regulations generally leave the determination to the taxpayer (or his preparer) to get it right. Many in the tax profession take the position that renting out even a single property can be a trade or business (Hazard v. Commissioner, Dec. 15,273, 7 TC 372, acq., 1946-2 CB3), and surely it is a trade or business if several properties are offered for rental and the property owner’s property management activities are considerable, continuous and regular. Therefore, if the activity is a rental trade or business, it will be subject to the 1099 reporting rules.

However, the 2012 instructions to Form 1099-MISC say the following (this language is absent from all subsequent instructions):

Repeal of reporting requirements for certain rental property expenses. The requirement described in the 2011 instructions for persons receiving rental income from real estate to report payments for certain rental property expenses on Form 1099-MISC was repealed by Congress. You do not have to report those payments on Form 1099-MISC.

Given the language of the 2012 instructions, the likelihood that the IRS would assess a landlord a penalty for failing to file a 1099-MISC now seems slim. However, it may be best practice to advise rental owners who are operating a rental trade or business to issue 1099s.