Do Landlords Need to File Form 1099-MISC?

All landlords should file Form 1099-MISC to qualify for important tax benefits including the 20% pass-through deduction.

If you're a landlord, do you need to file IRS Form 1099-MISC to report payments you make to independent contractors, such as property managers and repair people? Surprisingly, until now, it has never been clear. Some people believed landlords didn't have to file 1099s at all, or needed to file them only if they wanted to qualify as real estate professionals for purposes of the passive loss rules. Until now, the IRS never provided a definitive answer. However, the IRS has recently made it clear that all landlords should file Form 1099-MISC.

The reason a landlord should file Form 1099-MISC is to help the rental activity qualify as a business for tax purposes, instead of an investment activity. By doing so, you can qualify for several important tax benefits that are only available to businesses--for example:

  • the pass-through tax deduction, which can allow you to deduct up to 20% of your net rental income each year through 2025
  • the home office deduction
  • the deduction for the cost of attending rental-related seminars and conventions, and
  • the start-up expense deduction.

Additionally, when your rental activity qualifies as a business, you get the best possible tax treatment when you sell your rental property. Any gains are treated as capital gains, which are subject to a lower tax rate than ordinary income. If you sell the property at a loss, you may deduct the loss without limit against all your income. Such losses are limited to $3,000 per year if your rental activity qualifies as an investment activity, not a business.

Filing 1099s Can Help a Rental Activity Qualify as a Business

One of the most significant changes brought about by the Tax Cuts and Jobs Act was the creation of a brand new tax deduction for pass-through businesses. Pass-through business owners who qualify may deduct up to 20% of their net business income from their income taxes during 2018 through 2025. Landlords whose rental activity qualifies as a business may take the pass-through deduction.

In its final regulations on the pass-through deduction, the IRS discusses how to determine if a rental activity qualifies as a business. It says that “taxpayers should consider the appropriateness of treating a rental activity as a trade or business…where the taxpayer does not comply with the information return filing requirements." Information returns means filing Form 1099-MISC. In other words, it may not be appropriate to treat a rental activity as a business if a landlord does not file all required Forms 1099-MISC.

This is something the IRS has never said before. So now we know: Landlords should be filing 1099s. Failure to do so is a mark against you if the IRS ever questions whether your rental activity is a business.

When You Need to File Form 1099-MISC

Fortunately, filing Form 1099-MISC is not an onerous requirement. The basic rule is that you must file a 1099-MISC form with the IRS if you pay an unincorporated independent contractor $600 or more during a year for rental-related services. It makes no difference whether the sum was one payment for a single job or the total of many small payments for multiple jobs. This includes payments to property managers, repair people, and anyone else who performs services for your rental and is not your employee.

In calculating whether the payments made to an independent contractor total $600 or more during a year, you must include payments you make for parts
 or materials the independent contractor used in performing the services. For example, if
 you hire an electrician to rewire a rental building and he charges you separately for the electrical wiring and other materials he installs, the cost must be included in the tally.

You need to file Form 1099-MISC only if you pay an independent contractor $600 or more by cash, check, or direct deposit during the year. If you pay an independent contractor by an online payment service like PayPal, credit card, or any other type of electronic payment, you don’t need to file a Form 1099-MISC reporting the payment to the IRS. PayPal or the other payment service may have to report the payment; but this is not your problem.

How to File Form 1099-MISC

All 1099-MISC forms reporting payments to independent contractors must be filed with the IRS by January 31. This is so whether they are filed electronically or on paper. The independent contractor must also be provided a copy no later than January 31. Most states use the same filing deadline.

If you file fewer than 250 1099-MISC forms during the year, you have the option of filing them on paper or e-filing them. (The IRS prefers that you file electronically.)

To file on paper, you must obtain original 1099-MISC forms from the IRS for filing. You can’t photocopy this form because it contains several pressure-sensitive copies. To order the forms from the IRS, go to the IRS website. You can also use tax preparation or accounting software to prepare your 1099-MISCs. Alternatively, there are inexpensive online services that will complete and file the forms for you, such as efilemyforms.com, efile4biz.com, and efile1099now.com.

All your 1099-MISC forms must be submitted together along with one copy of Form 1096, which is a transmittal form. You must obtain an original Form 1096 from the IRS; you cannot submit a photocopy.

If you want to file electronically, you must get permission from the IRS first. Do this by filing IRS Form 4419, Application for Filing Information Returns Electronically. For more information, visit the IRS website or call the IRS Information Reporting Program at 886-455-7438. You may also send 1099 forms to your independent contractors by email. But you may do this only if the contractor agrees. If he or she doesn’t agree, you must deliver the 1099 by mail or in person.

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