Tax Law Changes
Part of the Small Business Jobs Act of 2010 (H.R. 5297) signed into law by President Obama affects anyone who owns even one rental property in 2011. All rental property owners are now required to report on Form 1099-MISC payments of $600.00 or more for rental property expenses, i.e., money paid to those people who provide services such as repairs, painting, cleaning, etc. Additionally, late filing or failure to file will result in penalties up to $250.
Please see the article below that appeared in the February 2011 issue of REALTOR Magazine, written by John M. Compagno, a real estate equity partner at the law firm of Holland & Knight LLP in San Francisco and a licensed real estate broker.
Click on https://www.irs.gov/pub/irs-pdf/i1099msc.pdf to view the 2011 Instructions for Form 1099-MISC.
"The IRS Needs to Know
The requirement to track vendors and issue 1099 forms isn’t new—it’s something that larger rental property owners already must do. But last year when the federal government enacted the Small Business Jobs Act of 2010 (H.R. 5297), it expanded this requirement to all property owners, no matter how small. Even property owners who are just doing rental as a sideline—maybe as part of a family investment fund or as part of a retirement savings plan—are now considered to be “conducting a trade or business,” so the 1099 reporting requirement now applies to them.
If you own a rental, that means you have a legal obligation to obtain certain information from your vendors—generally their name, address, and Social Security number or other tax identification—and to keep a record of the amount you pay them over the year. Then you must issue them a 1099 form to reflect the income you paid them for the year. (And don’t forget to keep a copy for yourself.)
Burden: Gathering the information and issuing the forms would create a hardship for you.
More guidance is forthcoming. The IRS will fill in the details on what constitutes a hardship and what’s considered “minimal” income, so you’ll want to verify those when they come out.
The requirement applies to all independent contractors or freelance workers that typically provide services in a rental real estate context. These include plumbers, electricians, painters, cleaning services, gardeners, landscapers, accountants, and handymen - in short, virtually all service providers to the property who don’t receive a W-2 form from you and who provide at least $600 in services for the year. It’s a cumulative amount, so even if a painting job costs you only $400, you need to track it and add any other charges from that vendor to see if the total comes to more than $600, which triggers the requirement.
You’ll want to review your bookkeeping procedures, with your accountant if you work with one, to be confident you have a system in place to track your payments to your vendors. You’ll also want to set up your tracking procedure so that you can record how you paid them: by credit card, debit card, check, or cash.
Penalties for Filing Late
As a general matter, you’ll be able to request a 30-day extension for getting your forms to the IRS, but that won’t apply to your deadline for getting the form to your vendors. Remember, your vendors will need to use those forms in preparing their tax returns.
For many owners, the new reporting requirement may come as a surprise. If you manage property for a small owner, make sure you let them know about this new rule. And if you’re the owner, take note of the filing deadlines and start carefully tracking your payments to vendors."
John M. Compagno is a real estate equity partner at the law firm of Holland & Knight LLP in San Francisco and a licensed real estate broker. You can reach him at email@example.com.