Updated: Jan 4, 2021
In the case of rental real estate, one of the most known and avoided aspects of tax law is the requirement to file 1099-MISC to report income to a vendor or contractor who has performed a service for the rental. Typically, the resistance from the taxpayer comes from either a misunderstanding of the process or a simple lack of willingness to obtain the information from the vendor. This article will be looking to answer the question, do I need to file a 1099 for someone who did work on my property?
New for 2020
A new 1099-NEC to report nonemployee compensation payments is to be used beginning in 2020. Other income or payments will be reported on the 1099-MISC.
Who is required to file?
You are required to report payments made during the operation of your trade or business. Personal payments do not need to be reported. You must file form 1099 for each person you have paid at least $600 during the year. There is an exception in which you can avoid this requirement, you do not need to include payments made to a corporation (including an LLC that is treated as an S corporation).
The important question to ask yourself, based on the requirements, would be “is my rental property a trade or business?” The answer to this question depends on the facts and circumstances relating to the activity. In general, a trade or business activity is one that a taxpayer participates in for the purpose of income or profit. In the tax court case, Commissioner v. Groetzinger, 480 US 23 (1987), we find clarification on this:
“We accept the fact that to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify.”
Taking this into consideration, I think that most single-family residences with a traditional tenant rental agreement will likely qualify as a trade or business. This would require the owner to file a 1099 based on the rules described above.
Example 1: John and Shirley Landlord own a rental property and it is rented to a tenant who pays fair market rent. During the year they paid $2400 to Property Management Inc, $450 to Tim for some paint and repairs expenses, and $1,200 George for gardening and landscape work. John and Shirley are only required to issue a 1099 to George because they paid him over $600 and he is not a corporation.
Example 2: Max and Ruby Rabbit own a second home that they rent to their son. They do not charge fair market rent. In this case, Max and Ruby do not have a trade or business. It is personal property and therefore is not under the 1099 filing requirement. However, they still need to report the rental income and are subject to loss limitations.
199A: Qualified Business Income
The 2018 Tax Cuts and Jobs Act brought a new 20% deduction on business income. Since many rental property activities to rise to the level of a trade or business, they can also qualify for this new deduction. Be advised that in taking this deduction you are arguing that your rental property is a trade or business. This will then require you to report payments on a 1099. It is unreasonable to argue that your activity is not a trade or business and then take this deduction.
Before any work is done to your rental property you should require the vendor or contractor to provide you with a W-9 prior to starting a project or before payment. Even if the initial project will cost less than $600, that dollar amount is cumulative. Many rental owners have fallen into the trap where a late-year repair pushes a vendor over the yearly limit, and they do not have the right information to prepare the 1099.
The bottom line, while a rental property does not automatically place you into a trade or business scenario, it is likely that it does. If you have any questions or need help with your filing requirements give us a call, we can provide this service for you.