Tax Alert – January, 2011-1
Be Alerted to New Filing Requirements for Landlords
The latest requirement for IRS information reporting continues the recent wave of increased reporting enacted as part of the 2010 Health Care Bill. These 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 applied to trades or businesses. This most recent proposal is focused on real estate, whether held for investment or for trade or business.
After December 31, 2010, landlords receiving rental income from real estate must provide a Form 1099 to the IRS and to all service providers for all payments of $600 or more made to service providers (plumbers, electricians, accountants, etc.) for rental property services provided to the landlord. To ensure compliance, the IRS can levy penalties of $50 for each failed-to-file Form 1099, up to a maximum of $100,000 or $250,000, depending on the type of delinquency.
These requirements are designed to close the "Tax Gap" by ensuring that income paid to contractors gets reported accurately, and that deductions for work on and improvements to rental properties can be verified by the 1099 form. The new reporting requirements do not apply to rental properties held out as a trade or business (owning multiple properties and a full-time business) because they are already covered. The law will, however, affect smaller landlords, who typically do not engage accountants to track contractors, verify deductions and report taxes. Obviously, this will create a new burden for small real estate operations.
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. 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.
Exceptions apply to individuals temporarily renting their principal residences, to taxpayers whose rental income does not exceed an IRS-determined minimal amount, and to those for 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, if past is prologue, these exceptions may be narrowly interpreted.
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, concerns about raising other taxes to offset the revenue loss would likely be a substantial hurdle for a total repeal of these provisions.
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