New 1099 Reporting Requirements for Landlords

Congress in 2010 expanded the information return reporting requirements contained in Code Sec. 6041. Generally, Code Sec. 6041 requires payments of $600 or more to a single recipient in the course of a trade or business to be reported by the payor to the IRS and the payee, usually on Form 1099-MISC. There are exceptions to the general reporting requirements but these exceptions begin to disappear in 2011.

One of these disappearing exceptions to the reporting requirements involves landlords. The Small Business Jobs Act of 2010 (2010 Jobs Act) (P.L. 111-240) amended the definition of trade or business to include renting real property. Before 2011, most landlords were not subject to the reporting requirements because renting real property was not considered to be a trade or business. Under the new version of Code Sec. 6041, real property rental is now considered a trade or business but only for purposes of the reporting requirements.

There are some exceptions to the general rule requiring landlords to report payments of $600 or more made in the course of renting real property. The first exception is for those who receive substantially all of their rental income from the temporary rental of their primary residence. The second exception is for individuals who receive "minimal" rental income, which amount will be determined by regulation. Similarly, the third exception applies to individuals receiving rental income if compliance with the reporting requirements would cause hardship. What constitutes hardship will also be defined by future regulations.

Like all returns, Forms 1099 must accurately identify the payor and the payee, as well as the total amount paid. Accurate identification includes the name, address and taxpayer identification number (TIN) of the payor and payee. The telephone number of the payee is also required.

It is the payor's obligation to request this information from the payee and Form W-9 may be used for this purpose. A landlord should request that Form W-9 be completed before making any payments to the payee because, if the payee fails or refuses to provide the correct taxpayer identification number, the payor is usually required to collect backup withholding from any payments due to the payee. The payor may be liable for a penalty for failure to backup withhold so withholding the correct amount from the payee is crucial. Also, a $50 penalty is imposed on a payee who fails to provide a correct TIN upon request.

Since landlords have not, until now, been "engaged in a trade or business," the reporting requirements create a problem. According to the instructions for Form 1099, sole proprietors and others, like landlords, who are not otherwise required to have an employer identification number (EIN) should use their Social Security number (SSN) for reporting purposes. Moreover, the instructions state that the filer's name and TIN should be consisted with the name and TIN used on the filer's other returns. This opens up the opportunity for identity theft.

Fortunately, landlords have a few options to protect themselves. The landlord can organize a separate company or LLC to perform management services for the property, including making payments to contractors. As the payor, the management company or LLC would be responsible for reporting any payments on Form 1099 and could use its own EIN, thus shielding the landlord's SSN. Another option is for the landlord to hire an employee. A spouse or child could be hired and an EIN obtained in order to report the wages of the new hire. This EIN could then be used on Form 1099, again shielding the landlord's SSN. Or, the landlord may be able to place the real property in a trust and use the trust's EIN for reporting purposes.

The deadline for providing Forms 1099 to payees is January 31 of the year following the year of payment. The deadline for filing the returns with the IRS is February 28 of the year following the year of payment. There is an extended deadline, March 31, when the returns are filed electronically.

The 2010 Jobs Act also increased the penalties for failing to file Forms 1099 with the IRS, for filing Forms 1099 late and for failing to provide copies of Forms 1099 to the payee. The increased penalties apply to information returns required to be filed after December 31, 2010.