Smaller-scale real estate rental activities are generally considered to be exempt from Form 1099 reporting requirements. With the arrival of the new pass-through income deduction of Code Section 199A, the determination of whether or not to file 1099 forms has new importance.
The support for the 1099 exemption is found in the language of a Congressional Committee Report from 2011, which states:
Under the provision, recipients of rental income from real estate who are not otherwise considered to be engaged in a trade or business of renting property are not subject to the same information reporting requirements as taxpayers who are considered to be engaged in a trade or business. As a result, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are not required to provide an information return (typically Form 1099-MISC) to the IRS and to the service provider.
The "gray area" results from the key question here – whether the taxpayer is "considered to be engaged in a trade or business of renting property." Many owners of real estate rentals consider the activities to be investments, rather than businesses.
There is no bright-line rule. Whether a real estate rental rises to the level of being a "trade or business" depends on the types of activities performed in the rental operation. A triple-net lease, where the lessor is not responsible for routine maintenance or paying the expenses of the property would probably not constitute a trade or business. When there is active management of the rental property, such as finding and vetting tenants and performing repairs and routine maintenance, a trade or business is more likely to exist.
New Section 199A provides a 20-percent deduction for business income of sole proprietors, partners, and S corporation shareholders, subject to certain limits. The application of Section 199A to real estate rental activities is not clear at this time. The proposed regulations that were issued over the summer did not provide much guidance, other than a special rule for related-party rentals. For rental income to qualify for the Section 199A deduction, it must be trade or business income.
Owners of real estate rental operations that are considered businesses should file 1099s for their business payments that exceed $600 for the year. This is especially important if the 199A deduction will be claimed. Boulay can help you with these filings if you do not want to handle it internally. The forms must be issued to the recipients by the end of January, so time is of the essence. Contact us at learnmore@BoulayGroup.com or 952.893.9320.
File Download: Rental Real Estate Reporting Policies Have New Significance