For payments made after December 31, 2010, landlords receiving $600 or more per year in rent from real estate will have to file Form 1099 information returns with the IRS and with their tenants. They also will have to send Form 1099s to the IRS and to all service providers (a plumber, an electrician, an accountant, etc.) for rental property services provided to the landlord for payments of $600 or more. To ensure compliance, the IRS can levy penalties of $50 for each failed-to-file Form 1099 with the IRS or the tenant or service provider. However, these penalties will be capped at either $100,000 or $250,000, depending on the type of delinquency.
Designed to close the tax gap, this new legislation was passed to ensure that income paid to contractors gets reported accurately and deductions for work and improvements or rental properties can be verified by the 1099 form. While this new reporting requirement will not impact rental properties held out as a trade or business (owning multiple properties and a full-time business) since they are already covered, it will affect smaller, “mom and pop” landlords, who typically are not armed with accountants to track contractors, verify deductions and report taxes. Obviously, this may create a new burden for small real estate operations.
What you need to do
If you own real estate, start planning ahead to track purchases made for goods or payments made for services of more than $600 and record all rental payments made by tenants of $600 or more for the year. This will mean getting a tax identification number from tenants and service providers, procuring the Form 1099 – MISC from the IRS, filling out the form(s), sending a copy to each payee, keeping a copy of the Form 1099 for your records, and then taking your rental deduction or reporting the rental income on your individual income tax return.
Reporting exceptions apply for individuals temporarily renting their principal residences, for taxpayers whose rental income does not exceed an IRS-determined minimal amount and for those whom the reporting requirement would create a hardship. The IRS has not issued guidance on what is the "minimal amount" or what constitutes a "hardship," and these exceptions may be narrowly interpreted if history is a guide.
This latest requirement of IRS information reporting continues the recent wave of increased information law reporting enacted by the passage of the 2010 Health Care Bill. Those changes essentially required a Form 1099 be sent to each service provider or seller of property for which a trade or business owner paid $600 or more for the year. Those requirements, however, only impacted trades or businesses. This most recent proposal is focused on real estate, whether held for investment or for trade or business.
Both the new Form 1099 reporting, along with the expansion of the IRS information reporting regime, have caused controversy and opposition which have generated legislative proposals to repeal or modify them. However, there are concerns about raising other taxes to repeal the provisions and this would be a substantial hurdle for a total legislative repeal.