Do I Need To File A 1099 For My Rental Property?

I got asked a question by one of my clients the other day about if they need to file a 1099 for their rental property.

Thjey often ask, "I have a rental property. Do I need to issue a Form 1099-MISC to the service providers such as a plumber or a carpenter?

My client once asked me this question.  This is not a simple question. I had to ask my client a few questions back to figure out the answer.

Are you engaged in a trade or business of renting a property?

Basically, to determine if you need to file a Form 1099-MISC for people you’ve paid $600 or more in relations to your real estate, you need to determine if you’re in the trade or business of renting property. The IRS publications define a business as a for-profit activity, but that doesn’t mean that every for-profit activity is necessarily a business. The IRS publication 925 specifically says “A trade of business activity doesn’t include a rental activity or the rental of property that’s incidental to an activity of holding the property for investment.” If you’re a property manager or manage a few properties for a living, you’re actually engaged in a trade of business of renting property and you must issue a Form 1099-MISC to your vendors so they can report it on their own tax form. In a business you typically spend a significant amount of time performing services for and managing the business. If you own the property only as an investment and hire a management company to deal with all issues of managing the property, you‘re not in a trade or business. Although there is no clear guidance to determine if you’re in a trade of business, if you qualify as a real estate professional, you are subject to a Form 1099 reporting requirements.  

Are you a real estate professional?

As mentioned above, if you’re a real estate professional, you must file a Form 1099 with the IRS. How do you qualify as a real estate professional?

  • You must materially participate in a real estate business. The business of renting and leasing realty is a real estate business.
  • More than 50% of the personal services you perform in all businesses during the year must be performed in real estate businesses in which you materially participate.
  • Your personal services during the year must amount to more than 750 hours. For these purposes, you can’t count any work you perform in your capacity as an investor. You don’t have to work full-time in real estate to qualify as a real estate professional. Even if you have another occupation, you may qualify.

If you have multiple properties, you may elect to treat all rental real estate interests as a single activity and thereby be able to meet the 750-hour requirement for all properties and not for each individual property.

Passive activity loss rules

If you conduct real estate property trade or business and qualify as a real estate agent, you’re exempt from the general passive activity loss rules. This is actually good for you because losses resulting from such activities can be used to offset ordinary income. Recent Tax Court Rulings in favor of the IRS highlight the importance of properly maintaining records of time spent conducting real estate activities.

1099 rules for a tenant, landlord, or manager of property for trade or business

Tenants

Tenants in commercial leases paying more than $600 a year should request a form W-9 from the landlord before paying them. In the following year, you should issue a Form 1099 to your landlord unless they’re taxed as a corporation.

Landlords

You should receive a Form 1099 from your tenant if they pay you over $600 in rent a year. If you currently use a property management company to take care of your property, you will need to issue and file or e-file a Form 1099 for their service fees. The property management company will then be responsible for issuing Forms 1099 to all the contractors such as carpenters or lawn care individuals they have hired to maintain your property.

Property Management Companies

Landlords must provide a Form W-9 to their property managers so they can receive a Form 1099 to report rent paid in excess of $600 during the year. As mentioned above, property managers must do the same for the following contractors not taxed as corporations that were hired and paid over $600 a year.

  • repairmen
  • plumbers
  • carpenters
  • landscapers
  • Attorney fees to handle an eviction or collect unpaid rent (even if the legal services were provided by a corporation).  

Property managers must file a 1099-MISC form for anyone they paid more than $600 to in the course of a year that is not a corporation.

What information Do I need to file a 1099?

If you have to issue and file a 1099 as a taxpayer, you will need the following information:

  • Tax ID Number– This is a social security number (SSN) or employee identification number (EIN) for individuals.
  • Address – This makes sure that a copy of the 1099 can be sent to the recipient, for their tax reporting requirements.
  • Funds Paid – You will need to know the amount of money issued to the individual during that tax year.

Considerations

The recipients of qualifying payments are required to report them to the IRS on Form 1099-MISC. Anyone who receives rental income must report their earnings on Form 1099-MISC, with one copy going to the IRS and an additional copy going to the entity that originally made the “payment.” That way, the IRS may keep track of compensation that isn’t typically documented. Self-managing rental property owners were once responsible to report the money they paid independent contractors for services on their own property.

In 2010, the Small Business Jobs Act and the Health Care Reform Bill ensured that however, the rules didn’t last long. By 2011 it was no longer necessary for private landlords to file Form 1099 to vendors for work related to their own rental property. Unless you’re in the trade or business of renting property or a real estate professional who materially participates in a real estate business, you won’t need to issue or file a IRS Form 1099 to your contractors. For more information, visit ww.irs.gov or consult with a tax professional.

Soo Lee

Soo Lee

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Soo has over 10 years of experience in publicly traded companies and public accounting firms offering tax, accounting, payroll and advisory services to clients in diversified industries including manufacturing, wholesale/retail businesses, construction, real estate development and investment, banking, finance and professional/legal consulting service. In Particular, when Soo was at Pricewaterhouse Cooper, Soo worked with many foreign owned U.S. companies and advised clients on a broad range of issues including federal and state tax minimization especially through R&D tax credit, determination of the optimal structure for new foreign investments, restructuring and reorganization for existing operations.

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